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Pollution Permits: A Discussion of Fundamentals

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  • David W. Weber

Abstract

The author provides an economic analysis of tradable pollution permits by clarifying the derivation of permit supply and demand relationships and connecting those concepts to permit trading for the case of two polluters. Using the standard comparison of costs and benefits, he makes the marginal cost of emission reduction of a typical polluter the basis of the derivation of its permit supply and demand schedules. Developing these relationships for both polluters allows the creation of market schedules for permit supply and demand. He demonstrates equilibrium in the market for permits and the corresponding trading of permits. He discusses the satisfaction of the equi-marginal principle, which ensures that pollution reduction is achieved efficiently. The author concludes by considering the consequences of the presence of a third polluter in the market for permits.

Suggested Citation

  • David W. Weber, 2002. "Pollution Permits: A Discussion of Fundamentals," The Journal of Economic Education, Taylor & Francis Journals, vol. 33(3), pages 277-290, September.
    • Handle: RePEc:taf:jeduce:v:33:y:2002:i:3:p:277-290
    DOI: 10.1080/00220480209595192
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    Cited by:

    1. Pasquale Scandizzo & Odin Knudsen, 2012. "Risk management and regulation compliance with tradable permits under dynamic uncertainty," European Journal of Law and Economics, Springer, vol. 33(1), pages 127-157, February.
    2. Ross Guest, 2009. "The Economics of Carbon Abatement: An Integrated Diagrammatic Framework," Economic Papers, The Economic Society of Australia, vol. 28(2), pages 93-101, June.

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