Permit markets with political and market distortions

Alex Dickson, Ian A. MacKenzie

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)
37 Downloads (Pure)

Abstract

This article investigates cap-and-trade markets in the presence of both political and market distortions. We create a model where dominant firms have the ability to rent seek for a share of pollution permits as well as influence the market equilibrium with their choice of permit exchange because of market power. We derive the equilibrium and show the interaction of these two distortions has consequences for the resulting marginal inefficiency—the extent to which a re-allocation of permits between firms can reduce equilibrium abatement costs. We find that if the regulator is not very responsive to rent seeking then marginal inefficiency reduces relative to the case without rent seeking. When the regulator is very responsive to rent seeking, if dominant rent-seeking firms are all permit buyers (sellers) then marginal inefficiency reduces (increases) relative to the case without rent seeking
Original languageEnglish
Pages (from-to)227-255
Number of pages29
JournalEnvironmental and Resource Economics
Volume82
Issue number1
Early online date25 Mar 2022
DOIs
Publication statusPublished - 31 May 2022

Keywords

  • pollution market
  • market power
  • rent seeking

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