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Multi-Pollutant Point-Nonpoint Trading with Participation Decisions: The Role of Transaction Costs

Carson Reeling, Richard D. Horan and Cloé Garnache

No 7152, CESifo Working Paper Series from CESifo Group Munich

Abstract: High transaction costs and thin participation plague water quality trading and prevent markets from delivering expected efficiency gains. Point sources generate a single pollutant, while nonpoint sources generate multiple, complementary pollutants. We develop a dynamic search model of point-nonpoint trading that includes transactions costs. These costs affect participation decisions and generate strategic complementarities with multiple large or small market participation levels equilibria. Integrated markets—with trading across pollutants—lead to lower transactions costs for both sources and a larger basin of attraction around the full-participation equilibrium, and thus may improve pollution trading efficiency relative to distinct markets.

Keywords: credit stacking; multi-pollutant trading; participation; strategic complementarities; transactions costs (search for similar items in EconPapers)
JEL-codes: D47 Q53 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-env and nep-gth
Date: 2018
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