The RAND Journal of Economics, Vol. 32, No. 4, pp. 762-774 (Winter 2001).
Juan Pablo Montero, in The RAND Journal of Economics, Vol. 32, No. 4, pp. 762-774 (Winter 2001).
I study the optimal design of marketable permit systems to regulate various pollutants (e.g., air pollution in urban areas) when the regulator lives in a real world of imperfect information and incomplete enforcement. I show that the regulator should have pollution markets integrated through optimal exchange rates when the marginal-abatement cost curves in the different markets are steeper than the marginal-benefit curves; otherwise he should keep markets separated. I also find that incomplete enforcement reduces the advantage of market integration.