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| Author: | Harstad, B. Eskeland, G.S. |
| Title: | Trading for the future: signaling in permit markets |
| Journal: | Journal of Public Economics
2010 : OCT, VOL. 94:9-10, p. 749-760 |
| Index terms: | rent-seeking economic policy economic efficiency distribution externalities direct costing |
| Language: | eng |
| Abstract: | Permit markets are celebrated as a policy instrument as they let firms to equalize marginal costs through trade and the regulator to spread the burden in a politically desirable way. These two concerns, however, can collide in a dynamic setting. Anticipating the regulator's future desire of giving more permits to firms that appear to have need for them, firms purchase permits to indicate their need. This increases the price above marginal costs, causing the market to become inefficient. In case of high social cost of pollution and frequent government market interventions, the distortions exceed the gains from trade and non-tradable permits become better. The analysis helps to understand permit markets and their proper design. |
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