Tradeable permits, missing markets, and technology

R. A. Devlin*, R. Q. Grafton

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Citations (Scopus)


This paper examines the effects of missing markets, heterogeneous pollutants, and the pollution technology of firms on the efficacy of transferable pollution permits. Under the assumption of perfect competition in all markets, we show that if firms can substitute among pollutants, then setting the "optimal" number of permits for only one pollutant will not, in general, lead to an efficient outcome. The degree of the inefficiency will depend on the information set available to the regulator and the substitutability among pollutants by firms. When establishing transferable pollution rights regulators should, therefore, consider the technology of firms. If firms discharge pollutants in the same fixed proportions, then the regulator need only set a market for one of the pollutants to ensure an efficient outcome. Where firms can substitute among pollutants, however, establishing a market for only one pollutant provides an incentive for firms to substitute to unregulated ones. This is an important policy issue as substitutability among pollutants within and across production processes may dampen the dynamic advantages of a tradeable permit policy.

Original languageEnglish
Pages (from-to)171-186
Number of pages16
JournalEnvironmental & Resource Economics
Issue number2
Publication statusPublished - Apr 1994


Dive into the research topics of 'Tradeable permits, missing markets, and technology'. Together they form a unique fingerprint.

Cite this