Permit Markets with Political and Market Distortions

Dickson, Alex and MacKenzie, Ian A. (2020) Permit Markets with Political and Market Distortions. Discussion paper. University of Strathclyde, Glasgow.

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Abstract

This article investigates the cost effectiveness of 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 subgame-perfect equilibrium and show the interaction of these two distortions has consequences for the resulting allocative efficiency of the market. We find that if the dominant rent-seeking firms are all permit buyers (or a composition of buyers and sellers) then allocative efficiency is improved relative to the case without rent seeking; by contrast, if the dominant rent-seeking firms are all permit sellers then allocative efficiency reduces.

  • Item type:Monograph(Discussion paper)
    ID code:73444
    Dates:
    Date
    Event
    21 January 2020
    Published
    Notes:Strathclyde Discussion Papers Economics, No. 20-01.
    Subjects:Social Sciences > Economic Theory
    Department:Strathclyde Business School > Economics
    Depositing user: Pure Administrator
    Date deposited:04 Aug 2020 13:01
    Last modified:09 Apr 2024 04:44
    URI:https://strathprints.strath.ac.uk/id/eprint/73444
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