Template-Type: ReDIF-Paper 1.0
Author-Name: Alex Dickson
Author-Name-First: Alex
Author-Name-Last: Dickson
Author-Email: alex.dickson@strath.ac.uk
Author-Workplace-Name: Department of Economics, University of Strathclyde
Author-Name: Ian A MacKenzie
Author-Name-First: Ian A
Author-Name-Last: MacKenzie
Author-Email: i.mackenzie@uq.edu.au
Author-Workplace-Name: School of Economics, University of Queensland, Brisbane, Australia, 4072.
Title: Permit markets with political and market distortions
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.


Length: 23 pages
Creation-Date: 2020-01
Revision-Date: 
Publication-Status: Published
File-URL: https://www.strath.ac.uk/media/1newwebsite/departmentsubject/economics/research/researchdiscussionpapers/20.1.pdf
File-Format: Application/pdf
Number: 2001
Classification-JEL: E65, G12, G18, P16
Keywords: pollution market, market power, rent-seeking.
Handle: RePEc:str:wpaper:2001