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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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.


Dickson, Alex ORCID logoORCID: and MacKenzie, Ian A.;