7. Tradeable Permits Flashcards
(17 cards)
How do tradeable emissions permits work?
Tradeable emissions permits create a property right to pollute
Why do tradeable permits satisfy the equimarginal principle?
If the companies can trade their permits, you can sell your permits to those who value them more. Under Coasian property rights this should satisfy the Equi marginal principal
In what situation would a firm buy a pollution permit?
If the price of the permit is lower than the firms MAC then they will buy a permit and pollute
In what situation would a firm sell a pollution permit?
If the current price of the permit exceeds the firms marginal abatement cost, then the firm will sell the permit and abate instead
How do we draw what allocation of permits is optimal?
Draw an edgeworth box
Where is the optimal quantity of permits found?
Where the marginal savings from pollution are equal to the aggregate marginal damage
What 3 factors prevent the trade in permits?
- Market power
- Market thinness
- Transaction costs
What do price controls (emissions taxes) do to the MCA and quantity of abatement?
- Marginal cost of abatement is fixed by the regulator
- Quantity of abatement is determined by market
What do quantity controls (tradable permits) do to the MCA and quantity of abatement?
- QUANTITY of abatement is fixed by the regulator
- Marginal cost of abatement is determined by market
When are tradable emissions permits preferred?
They are preferred when marginal damages from emissions have a steeper slope than marginal savings
When are emissions taxes preferred?
When marginal damages from emissions have a flatter slope than marginal savings
What does it mean to grandfather permits?
To give them out for free
What can auctioning vs grandfathering of permits cause in the long-run?
Can effect firm entry/ exit
What can auctioning vs grandfathering of permits cause in the short-run?
No differing impact
When there is uncertainty about marginal savings, what matters?
The relative slops of MS and MD
If MD is steeper than MS, what policy should be used?
Emissions permits
If MD is flatter than MS, what policy should be used?
Emissions taxes
