THE DESIGN OF A DYNAMIC TRADEABLE QUOTA SYSTEM UNDER MARKET IMPERFECTIONS

Market power within a dynamic system of tradeable quotas with banking and borrowing of quotas leads to a nonoptimal distribution of abatemen t across agents. In this paper we introduce a quota system that may re duce the efficiency loss from market power and thereby result in a dis tribution of abatement across agents that is closer to a cost-effectiv e outcome. However, this system will in general lead to a nonoptimal d istribution of abatement across periods. Hence, we may face a trade-of f between a cost-effective distribution of abatement across periods an d reduced adverse effects of market power. (C) 1998 Academic Press.