Should Consumers Be Priced Out of Pollution-Permit Markets?

Abstract

The authors present a simple diagrammatic exposition of a pollution-permit market in which both firms that generate pollution and consumers who are harmed by pollution are allowed to purchase permits at a single market price. They show that the market equilibrium is efficient if and only if the endowment of permits is equal to the efficient level of pollution. Furthermore, if consumers actually participate in the market, then the equilibrium is not efficient. Welfare can be improved by decreasing the endowment of permits and thereby pricing consumers out of the market.

Key Words:

• diagrammatic
• efficiency
• environmental policy
• pollution permit markets
• retired permits

Additional information

Notes on contributors

Stefani C. Smith

Stefani C. Smith is an assistant professor of economics at Lander University (e-mail: [email protected]), and Andrew J. Yates is an associate professor of economics at the University of Richmond.