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Multipollutant Markets

Juan Pablo Montero

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.

 

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