Permit markets with political and market distortions

Alex Dickson and Ian MacKenzie
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Alex Dickson: Department of Economics, University of Strathclyde, Glasgow, UK, G4 0QU.

No 615, Discussion Papers Series from University of Queensland, School of Economics

Abstract: This article investigates the cost effectiveness of 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 subgame-perfect equilibrium and show the interaction of these two distortions has consequences for the resulting allocative efficiency of the market. We find that if the dominant rent-seeking firms are all permit buyers (or a composition of buyers and sellers) then allocative efficiency is improved relative to the case without rent seeking; by contrast, if the dominant rent-seeking firms are all permit sellers then allocative efficiency reduces.

Keywords: Pollution market; Market power; rent seeking. (search for similar items in EconPapers)
JEL-codes: D43 D72 Q58 (search for similar items in EconPapers)
Date: 2020-01-21
New Economics Papers: this item is included in nep-com, nep-env, nep-gth, nep-ore and nep-pol
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https://economics.uq.edu.au/files/17554/615.pdf (application/pdf)

Related works:
Journal Article: Permit Markets with Political and Market Distortions (2022)
Working Paper: Permit markets with political and market distortions (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:615

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