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Permit markets with political and market distortions

Alex Dickson () and Ian MacKenzie
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Alex Dickson: Department of Economics, University of Strathclyde

No 2001, Working Papers from University of Strathclyde Business School, Department 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 ellers then allocative efficiency reduces.

Keywords: pollution market; market power; rent-seeking. (search for similar items in EconPapers)
JEL-codes: E65 G12 G18 P16 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2020-01
New Economics Papers: this item is included in nep-com, nep-ene, nep-env, nep-gth, nep-mac and nep-ore
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Related works:
Journal Article: Permit Markets with Political and Market Distortions (2022) Downloads
Working Paper: Permit markets with political and market distortions (2020) Downloads
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