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A Tradable Permit System in an Intertemporal Economy: A General Equilibrium Approach

Ken-Ichi Akao and Shunsuke Managi

No 658, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: The creation of an artificial market through a tradable permit system as a remedy against market failure is gaining popularity among analysts and policymakers. We show that in an intertemporal competitive economy, a tradable permit system may not achieve efficiency without setting appropriate permit interest rates (rewards for holding permits), and to find them, we must know in advance the path of efficient permit prices, which is difficult or impossible to obtain. We deal with this problem in two ways. First, we seek a special case in which the permit interest rates are given by a simple rule. Second, we propose a mechanism by which the permit interest rates are generated endogenously. The determinacy of an equilibrium under a tradable permit system is also examined.

Keywords: Auction; artificial market, tradable permit system, general equilibrium, permit interest rate, permit bank, indeterminacy (search for similar items in EconPapers)
JEL-codes: H23 K32 Q58 (search for similar items in EconPapers)
Pages: 29pages
Date: 2008-08
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env, nep-law and nep-reg
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Journal Article: A Tradable Permit System in an Intertemporal Economy (2013) Downloads
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