Multiplicity of investment equilibria when pollution permits are not tradable

Larry S. Karp

No 1018, Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: We study a model in which the level of environmental regulation depends on abatement cost, which depend on aggregate levels of investment in abatement capital. Firms are non-strategic. When emissions quotas are not tradable, there are multiple competitive equilibria to the investment problem. Allowing trade in permits leads to a unique socially optimal equilibrium. For a given distribution of investment, allowing trade in permits has an ambiguous effect on the optimal level of regulation. Previous results on coordination games with non-atomic agents are applied to the problem of environmental regulation with endogenous investment in abatement capital.

Keywords: tradable permits; coordination games; multiple equilibria; global games (search for similar items in EconPapers)
Date: 2006-05-10
Note: oai:cdlib1:are_ucb-1114
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