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Chapter 13.docx

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University of Lethbridge
ECON 3220
Ali Kamar

Chapter 13-1 Marketable pollution permits  Type of permit or right to emit a specific amount of pollution  The permits or rights are transferable or marketable o Sold and bought by polluters  A permit market automatically develops which determines price o It is the third type of centralized market based incentive policies of environmental regulation but it works like a decentralized one o Government’s role is to determine the aggregate pollution target, create a number of permits based on the target, and distribute/auction off among polluters  100 tonnes/ear  100 permits (1 permit per 1 tonne) or 20 permits (1 permit per 5 tonnes), etc... o Polluters are allowed to buy and sell (trade) their permits in private market (decentralize part) depending on their MAC profiles. This is why it is also known as the Cap-and –trade policy o If the government has perfect knowledge of MAC and MD curve, ti can determine the socially efficient number of permits by equating the MAC curve to the MD curve. Class exercise: Marketable permits  Suppose the government somehow determines the total number of permits at the socially optimal level of emissions, where MAC=MD o A) using the diagram, determine the net benefits to the society of this marketable pollution policy  Without regulation, polluters have no incentive to cut back from EM  TAC=0  TDC= A+B+C+D  TSC= TAC+TDC=A+B+C+D+0  With E* number of permits, emission must be reduced from E M to E*  At E*  TAC=B  TDC=A  TSC= TAC+TDC= A+B  Comparing net benefits t society  (A+B+C+D) – (A+B) = C+D o B) what is the difference of this policy with the pollution standard, tax or subsidy policies?  We use arrive at the same pollution level and same net benefits to society but here is no extra cost on polluters (tax bill) or on the government (like subsidy) or not cost or benefits to the polluters (with standard) Marketable permits- incentive to trade?  Suppose there are two polluters: o On high abatements cost polluter (MAC ) 1 and the other low abatement costs polluter (MAC ) 2 M  Without regulation, each emits E level pollution, total=2E  Government wants them to reduce emissions to half (E ) so that each polluter emits only half of M its unregulated level (E /2=E*)  Permit design: one unit of target emission = one permit o So total number of permits = E =2E*  If
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