The Effects of Rent Seeking over Tradable Pollution Permits

Nick Hanley and Ian MacKenzie

The B.E. Journal of Economic Analysis & Policy, 2010, vol. 10, issue 1, 26

Abstract: The establishment of a tradable permit market requires the regulator to select a level of aggregate emissions and then distribute the associated permits to specific groups. Both these decisions create opportunities for rent seeking. In this paper, we use a contest model to analyse the incentives to rent seek for pollution permits and to analyse the consequences for social welfare. We find differences in firms' rent-seeking choices compared to a conventional rent-seeking contest. We see that a fundamental aspect of firms' incentives to rent seek depends on the market value of the permits, that is, the value of the ex post reallocated rents. This impact depends on the responsiveness of the regulator to aggregate rent-seeking effort. The responsiveness, in some cases, may improve welfare by reducing the per-unit value of permits, which may lower the rent-seeking effort more than it increases the damages experienced from the additional emissions.

Keywords: tradable permit market; rent seeking; initial allocation (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (9)

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Related works:
Working Paper: The effects of rent seeking over tradable pollution permits (2010)
Working Paper: The effects of rent seeking over tradable pollution permits (2009)
Working Paper: The effects of rent seeking over tradable pollution permits (2009)
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DOI: 10.2202/1935-1682.2497

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