USING MARKETS TO ALLOCATE POLLUTION PERMITS AND OTHER SCARCE RESOURCERIGHTS UNDER LIMITED INFORMATION

We consider the design of government policy to ration such scarce reso urces as water or pollution permits in the presence of limited informa tion. When government policy is formulated, some informed agents (e.g. established public utilities) know how highly they value the resource . Other uninformed agents (e.g. potential independent power producers) only learn their valuations at some later date. The government allows uninformed agents to trade the resource rights they receive on a comp etitive market. Informed agents may or may not have the same privilege . The optimal initial distribution of resource rights differs signific antly according to whether informed agents can trade the rights they r eceive.