TRANSACTION COSTS AND TRADEABLE PERMITS

Tradeable-permit systems are at the center of current interest and act ivity in market-based reforms of environmental policy, because these s ystems can offer significant advantages over conventional approaches t o pollution control. Unfortunately, claims made for their relative cos t-effectiveness have often been exaggerated. Transaction costs, which may be significant in these markets, reduce trading levels and increas e abatement costs. Ln some cases, equilibrium permit allocations and h ence aggregate control costs are sensitive to initial permit distribut ions, providing an efficiency justification for politicians' typical f ocus on initial allocations. (C) 1995 Academic Press, Inc.