University of Melbourne

Transactions Costs in Tradable Permit Markets: An Experimental Study of Pollution Market Designs

Email address: latag@unimelb.edu.au

Keywords: Emission Trading, Transaction Costs, Laboratory Experiments, Allocation Mechanisms, Environmental Regulation

JEL Classifications: C91, Q20, Q28

Abstract:
In recent years many countries have adopted or are considering incentive approaches to environmental regulation such as tradable permit schemes to control pollution. In this paper we use laboratory experiments to study the design features of tradable permit programs, focusing on the transaction costs incurred by participants. In the absence of transaction costs, in a competitive market the initial distribution of permits affects equity but has no impact on the efficiency of final allocations. In the presence of transaction costs, however, even in a competitive market the initial distribution of permits can affect both efficiency and equity. We study treatments in which marginal transaction costs are zero, constant and declining. Traders transact through the continuous double auction institution. Our results show that consistent with theory, when marginal transaction costs are declining prices deviate less from the competitive equilibrium if the "misallocation" of the initial permit distribution is greater. The deviation from the zero transaction cost competitive equilibrium does not vary with the initial permit endowment when marginal transaction costs are constant.

PDF file of paper: gangadharan.pdf

Session: Environmental and Resource Economics

Time: Saturday, 7 July, 2:15pm - 3:45pm

Room: F