Permit markets with political and market distortions

Dickson, Alex and MacKenzie, Ian A. (2022) Permit markets with political and market distortions. Environmental and Resource Economics, 82 (1). pp. 227-255. ISSN 0924-6460 (https://doi.org/10.1007/s10640-022-00673-2)

[thumbnail of Dickson-MacKenzie-ERE-2022-Permit-markets-with-political-and-market]
Preview
 Text. Filename: Dickson_MacKenzie_ERE_2022_Permit_markets_with_political_and_market.pdf
Final Published Version
License: Creative Commons Attribution 4.0 logo
Download (1MB)| Preview

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

ORCID iDs

Dickson, Alex ORCID logoORCID: https://orcid.org/0000-0001-9386-9036 and MacKenzie, Ian A.;
CORE (COnnecting REpositories)