the socially optimal recycling rate evidence from japan this paper estimates the average social cost of municipal waste management as a function of the recycling rate social costs include all municipal costs and revenues costs to recycling households to prepare materials estimated with an original method external disposal costs and external recycling benefits results suggest average social costs are minimized with recycling rates well below observed and mandated levels in japan cost minimizing municipalities are estimated to recycle less than the optimal rate these results are robust to changes in the components of social costs indicating that japan and perhaps other developed countries may be setting inefficiently high recycling goals

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

measuring the damages of air pollution in the united states abstract this paper measures the damages due to emissions of air pollution in the united states an integrated assessment model is used to calculate the marginal damage associated with emitting an additional ton of pollution from nearly 10 000 sources in the u s the total damage produced by a source is the marginal damage of an emission its shadow price times the total tons emitted from a specific source adding total damages across all sources yields gross annual damages gad which is a green accounting parallel to gross domestic product gdp gad in 2002 varies between 71 billion and 277 billion 0 7 2 8 of gdp the range of values depends largely on the value of health and the concentration response function relating exposures to fine particulate matter pm 2 5 to adult mortality rates source location also matters urban emissions constitute 52 of total emissions by weight yet they cause nearly three quarters of the gad

a geographically resolved method to estimate levelized power plant costs with environmental externalities in this analysis we developed and applied a geographically resolved method to calculate the levelized cost of electricity lcoe of new power plants on a county by county basis while including estimates of some environmental externalities we calculated the lcoe for each county of the contiguous united states for 12 power plant technologies the minimum lcoe option for each county varies based on local conditions capital and fuel costs environmental externalities and resource availability we considered ten scenarios that vary input assumptions we present the results in a map format to facilitate comparisons by fuel technology and location for our reference analysis which includes a cost of 62 tco2 for co2 emissions natural gas combined cycle wind and nuclear are most often the lowest lcoe option while the average cost increases when internalizing the environmental externalities carbon and air pollutants is small for some technologies the local cost differences are as high as 0 62 kwh for coal under our reference analysis these results display format and online tools could serve as an educational tool for stakeholders when considering which technologies might or might not be a good fit for a given locality subject to system integration considerations

endogenous technical change and environmental regulation abstract a model of environmental regulation under uncertainty is developed to compare the effect of price versus quantity rules upon technical change quantity rules tend to encourage more efficient levels of technical change

an interim evaluation of sulfur dioxide emissions trading ide iv of the 1990 clean air act amendments established the first large scale long term environmental program to rely on tradable emissions permitscalled allowances in this program to control pollution this program was designed to cut acid rain by reducing sulfur dioxide so2 emissions from electric generating plants to about half their 1980 level beginning in 1995 it is of interest both as a response to an important environmental issue and as a landmark experiment in environmental policy this experiment comes at a particularly important time since emission trading is under serious consideration with strong u s backing for use to deal with global climate change by curbing emissions of carbon dioxide co2 the economic stakes in climate change surpass those in acid rain by several orders of magnitude intergovernmental panel on climate change 1996 this article summarizes the results to date of our ongoing empirical analysis of compliance costs and allowance market performance under the u s acid rain program

nonconvexity induced by external costs on production theoretical curio or policy dilemma this paper considers with a degree of scepticism the sweeping policy conclusions that can be found in the theoretical literature concerning nonconvexit ies in the social production set induced by external costs on firms this literature has provided proofs of the possibility that such nonconvexit ies exist but these proofs have readily been interpreted as a basis on which to judge the advisability of policies to control external costs 2 indeed a number of authors have felt able to proceed from specific theoretical examples of the existence of nonconvexity to the opinion that nonconvexity represents a general obstacle to policy one of the ma in themes will be to demonstrate that the theoretical possibility of the existence of a nonconvexity at a m icro level does not imply the existence of a m icro or a fortiori macro nonconvexity in the real world nor does it imply that any nonconvexity that does exist in reality is relevant to policy the intention is not to deny that nonconvexit ies may represent an obstacle to the efficient control of external costs in specific contexts but in order to establish the real world policy relevance of a nonconvexity it is necessary to verify its existence emp irically and to establish that it stands in a particular relationship to the no policy starting point

do exchange rates affect the capital labour ratio panel evidence from canadian manufacturing industries using industry level data for canadian manufacturing industries from 1981 to 1997 we find empirical evidence of a negative relationship between the capital labour ratio and the user cost of capital relative to the price of labour a 10 increase in the user cost of the machinery and equipment m e relative to the price of labour results in a 3 3 decrease in the m e labour ratio in the long run assuming complete exchange rate pass through into imported m e prices the maximum effect of a permanent 10 depreciation in the exchange rate is a 1 7 decline in the m e labour ratio this result implies that the cumulative growth of the m e labour ratio during the 1991 to 1997 period would have been 2 3 percentage points higher had the dollar not depreciated this may appear to be significant but considering both m e as a share of total capital and the capital share of nominal output are both approximately one third in terms of a simple growth accounting framework the effect on labour productivity is small

technological choices and regulation the case of the canadian manufacturing sectors the economic environment in which canadian manufacturing firms operate has changed substantially over the last 40 years technological changes new regulations deregulation and exogenous economic shocks all have been important aspects of this economic environment in this article we show how to include such changes in the economic environment faced by the firms in a behavioural model that includes the investment decision of the firm under uncertainty assumptions regarding the expectation formation process and technology are kept minimal we estimate the effects of innovations such as the free trade agreement the foreign investment review agency and the federal environmental policy on the economic decisions of fifteen canadian manufacturing sectors jel classification d24 choix de technologies et reglementation le cas des secteurs manufacturiers canadiens au cours des 40 dernieres annees l environnement economique des firmes manufacturieres canadiennes s est grandement transforme que ce soit a cause du changement technologique de la reglementation de vagues de dereglementation ou de chocs economiques exogenes les firmes ont du s adapter en modifiant leur technologie dans cet article nous montrons comment prendre en compte les changements de l environnement economique des firmes dans le cadre d un modele decisionnel de la firme en incertitude avec investissement les hypotheses concernant la technologie et les anticipations sont aussi generales que possible nous estimons l effet qu ont eu l accord de libre echange l agence de tamisage des investissements etrangers et la politique environnementale federale sur les choix de technologies des firmes de quinze secteurs manufacturiers canadiens

fiscal federalism and interjurisdictional externalities new results and an application to us air pollution abstract the economics of fiscal federalism has identified two book end departures from first best provision of a public good local governments may respond to local conditions but ignore inter jurisdictional spillovers alternatively central governments may internalize spillovers but impose uniform incentives ignoring local heterogeneity we provide a simple model that demonstrates that the choice of pricing policy also depends crucially on a third factor the shape of marginal costs of providing the public good if marginal costs are convex then marginal abatement cost elasticities will be higher around the local policies this increases the deadweight loss of those policies relative to the centralized policy ceteris paribus if they are concave then the opposite is true using a detailed simulation model of the us electricity sector we then empirically explore these tradeoffs for us air pollution we find that us states acting in their own interest lose about 31 5 of the potential first best benefits whereas the second best uniform policy loses only 0 2 of benefits the centralized policy outperforms the state policy for two reasons first inter state spillovers are simply more important that inter state heterogeneity in this application second because of the convexity of the marginal cost functions elasticities are much lower over the range relevant to the centralized policy dampening the distortions

factor demands cost functions and technology measurements for regulated in this paper we provide some missing elements to the theory of the regulated firm and discuss implications for econometric specification particular attention is paid to situations where capital is quasi fixed under rate of return regulation which may lead to serious specification and interpretation errors if the current theoretical basis is not adjusted we also extend the analysis to arbitrary types of regulation and indicate precisely how the differential of factor demands can be specified and what regularity conditions it must satisfy the exact formula for the calculation of marginal products returns to scale and technological change are derived

multiple pollutants co benefits and suboptimal environmental policies abstract in our analytical general equilibrium model polluting inputs can be substitutes or complements we study a tax increase on one pollutant where the other faces a tax or permit policy our solutions highlight key parameters and welfare effects with gains from abatement plus positive or negative co benefits from other pollutants in the covered and uncovered sectors we demonstrate several ways taxes and permits differ first the change in taxed pollutant depends on whether the other pollutant faces a tax or permit policy also only with a tax on the other pollutant can a co benefit arise the sign of co benefits depends on the sign of cross price elasticities and on whether the other pollutant s price is above or below marginal damages finally the other pollutant s tax or permit policy also affects emissions in the uncovered sector leakage in a numerical illustration of carbon tax in u s electricity we calculate emissions of co2 and so2 in both sectors for plausible parameters co benefits are larger than direct

are there environmental benefits from driving electric vehicles the importance of local factors we combine a theoretical discrete choice model of vehicle purchases an econometric analysis of electricity emissions and the ap2 air pollution model to estimate the geographic variation in the environmental benefits from driving electric vehicles the second best electric vehicle purchase subsidy ranges from 2 785 in california to 4 964 in north dakota with a mean of 1 095 ninety percent of local environmental externalities from driving electric vehicles in one state are exported to others implying they may be subsidized locally even when the environmental benefits are negative overall geographically differentiated subsidies can reduce deadweight loss but only modestly

market design in cap and trade programs permit validity and compliance timing abstract cap and trade programs have considerable heterogeneity in permit validity and compliance timing for example permits have different validities across time e g banking borrowing and seasons and space e g zonal restrictions and compliance timing can be annual in overlapping cycles or in multi year periods we discuss nine prominent cap and trade programs along these dimensions and construct a general model of permit validity and compliance timing we derive sufficient conditions under which abatement is invariant to compliance timing i e compliance timing cannot smooth abatement cost shocks under these conditions i expected compliance costs are invariant ii the variance of compliance costs increases with the delayed compliance iii equilibrium prices may not be unique and iv the delayed compliance equilibrium may rely on degenerate prices not determined by marginal abatement costs we demonstrate the model s broad applicability by illustrating different types of temporal permit validity

optimal tax policy under heterogeneous environmental preferences abstract we model an economy of k heterogeneous regions where agents value consumption vs nature differently consumption obtained through pollution inducing production also generates a negative externality on neighbors we show that even with a decentralized policy we can obtain first best efficiency by choosing a combination of pollution taxes in both regions and lump sum transfers moreover we show that optimal pollution taxes are determined only by the externality parameters independent of agents preferences for consumption and nature

the problem of the commons still unsettled after 100 years the problem of the commons is more important to our lives and thus more central to economics than a century ago when katharine coman led off the first issue of the american economic review as the us and other economies have grown the carrying capacity of the planet in regard to natural resources and environmental quality has become a greater concern particularly for commonproperty and open access resources the focus of this article is on some important unsettled problems of the commons within the realm of natural resources there are special challenges associated with renewable resources which are frequently characterized by open access an important example is the degradation of openaccess fisheries critical commons problems are also associated with environmental quality a key contribution of economics has been the development of market based approaches to environmental protection these instruments are key to addressing the ultimate commons problem of the twenty first century global climate change jel q15 q21 q22 q25 q54

your money or your life green growth policies and welfare in 2050 this paper proposes a simple index of economic progress that weighs in the monetary cost induced by climate change mitigation policies as well as the health benefits arising from the reduction in local air pollution the shadow price of pollution is calculated indirectly through its impact on life expectancy taking into account the health benefits of mitigation policies significantly reduces their monetary cost in china and india as well as in countries with large fossil based energy producing sectors australia canada and the united states

an assessment of two environmental and economic benefits of cash for clunkers abstract this research aims to provide a more comprehensive life cycle accounting of two categories of environmental and economic benefits associated with the 3 billion us cash for clunkers vehicle scrappage program first using a life cycle emissions methodology developed in lenski et al 2010 we find that about 29 000 metric tons of criteria pollutant emissions were avoided for a benefit of about 23 million avoided carbon dioxide emissions by comparison provided a benefit worth 90 million second we compare the market value of scrapped vehicles to the rebates provided calculating the consumer surplus or gift to participants to be up to 2 billion about 2000 to 3000 per vehicle this is significantly more than offered in previous vehicle scrappage programs and suggests opportunities to get more environmental and economic bang for the buck finally these two categories of benefits are found to be heavily concentrated geographically around urban centers about 2 of us counties 50 counties received 50 and 30 of the aggregate benefits from avoided criteria pollutant emissions and consumer surplus from the rebates respectively

economic spillovers in spatial harvest behavior abstract there has been a strong push within natural resource management to incorporate spatial structure into management regimes however discussions surrounding the appropriate designs of spatial management have largely been conceptual this paper develops a spatial econometric model of fishing location choice using non confidential data from the great barrier reef coral trout commercial fishery harvest location decisions are modeled as a function of spatial patterns of expected economic returns the preferred spatially dependent econometric model is shown to outperform ordinary least squares and fixed effects models in out of sample forecasting estimates from the spatial model reveal spatial spillover effects in fleet harvest location behavior in particular harvest activity at any given site is equally sensitive to same site economic returns and surrounding site economic returns the econometric results are illustrated using a fee based policy simulation results suggest non spatial management is characterized by two inefficiencies first heterogeneity between sites is averaged resulting a fee that is too high or too low across space second fees that are too high or too low affect the fishing effort in nearby locations

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

implementing optimal taxes using tradable share permits abstract this paper presents a simple system for efficient regulation under asymmetric information each firm s income is controlled by a tax that depends on the firm s own output and on a parameter construed as a share permit these shares of total expected output lower a firm s tax burden and are acquired in a competitive market by employing this scheme the planner only requires knowledge of marginal damage to induce the first best outcome relative to a traditional cap and trade approach the system increases expected social welfare

compensating differentials and unmeasured ability in the labor market for nurses why do hospitals pay more nurses employed in hospitals realize a large wage advantage relative to nurses employed elsewhere this paper examines alternative sources of the hospital premium a topic of some interest given the current shifting of medical care out of hospitals whereas cross sectional estimates indicate a hospital rn wage advantage of roughly 20 percent longitudinal analysis suggests that a third to a half of the advantage is due to unmeasured worker ability the remainder is likely to reflect compensating differentials for hospital disamenities we further probe possible sources of the rn hospital premium by examining the receipt of fringe benefits differences in cognitive ability as measured by afqt test scores differences in the quality of experience the role of labor unions and rents earnings on second jobs and the magnitude of wage differentials associated with work shift

transaction costs and tradeable permits abstract tradeable permit systems are at the center of current interest and activity in market based reforms of environmental policy because these systems can offer significant advantages over conventional approaches to pollution control unfortunately claims made for their relative cost effectiveness have often been exaggerated transaction costs which may be significant in these markets reduce trading levels and increase abatement costs in some cases equilibrium permit allocations and hence aggregate control costs are sensitive to initial permit distributions providing an efficiency justification for politicians typical focus on initial allocations

the multivariate flexible accelerator model its empirical restrictions and an application to u s manufacturing this paper derives an exhaustive set of restrictions implied by the multistock flexible accelerator specification of the adjustment cost model for the firm the flexible accelerator specification of the demand for capital and labor is estimated using u s manufacturing annual data for the 1947 1976 period the consistency of the data with the model is examined by testing the validity of the derived restrictions finally the conditions which permit aggregation over firms are determined and tested empirically the flexible accelerator specification has been popular in the empirical literature on interrelated investment and employment decisions see nadiri and rosen 38 coen and hickman 10 and schramm 40 more recent examples include sargent 39 berndt fuss and wavermann 4 berndt and morrison 6 and meese 34 under suitable assumptions the specification may be rationalized by the adjustment cost model of the firm eisner and strotz 13 lucas 30 mortensen 35 extends the work of lucas and derives some empirically testable restrictions of the accelerator specification that are implied by the adjustment cost framework the broad objective of this paper is to provide a more rigorous and comprehensive test of the adjustment cost model than is presently found in the literature this objective is achieved in three stages first we offer an alternative derivation of the mortensen restrictions and more importantly we prove theorem 1 that his restrictions are exhaustive i e we establish an integrability result for the flexible accelerator adjustment cost model second the flexible accelerator specification of the demand for capital and labor is estimated using total u s manufacturing annual data for the 1947 76 period it is assumed that firms minimize expected production costs subject to a technology which implies that capital and labor stocks are costly to adjust while a third factor materials is freely adjustable the consistency of the data with the adjustmentcost framework is examined by testing for the validity of the derived restrictions further we test the validity of some separability restrictions on the adjustmentcost technology that to varying degrees are imposed a priori in all of the cited empirical studies finally we provide a complete characterization of the individual firm technologies which justify the common assumption of the existence of a representative firm this problem of aggregation over firms which has been

the empirical properties of two classes of designs for transferable discharge permit markets abstract previous work by atkinson and lewis j environ econ manag 1 237 250 1974 and anderson et al an analysis of alternative policies for attaining and maintaining a short term no2 standard mathtech inc princeton n j 1979 has indicated the tremendous cost advantages to be achieved by moving from a policy based on emission standards to one based on marketable emission permits as tietenberg land econ 56 391 416 1980 points out however neither of the major permit designs treated in the literature are optimal from all points of view this has triggered a search for alternative permit designs which while they may not minimize compliance costs have sufficient other virtues as to make them attractive on other grounds the purpose of this paper is to examine within the context of an empirical mathematical programming model the air quality emission and cost consequences of two classes of the permit designs which can be implemented in the absence of information on control costs this case study involves particulate control in st louis

do energy efficiency investments deliver evidence from the weatherization assistance program a growing number of policies and programs aim to increase investment in energy efficiency because conventional wisdom suggests that people fail to take up these investments even though they have positive private returns and generate environmental benefits many explanations for this energy efficiency gap have been put forward but there has been surprisingly little field testing of whether the conventional wisdom is correct this article reports on the results of an experimental evaluation of the nation s largest residential energy efficiency program the weatherization assistance program conducted on a sample of approximately 30 000 households in michigan the findings suggest that the upfront investment costs are about twice the actual energy savings furthermore the model projected savings are more than three times the actual savings although this might be attributed to the rebound effect when demand for energy end uses increases as a result of greater efficiency the article fails to find evidence of significantly higher indoor temperatures at weatherized homes even when accounting for the broader societal benefits derived from emissions reductions the costs still substantially outweigh the benefits the average rate of return is approximately 7 8 annually

do part time full time compensation differentials for nurses vary between the private and public sector this study examines whether compared to their private sector counterparts public sector health care employers are at a disadvantage using part time pt nurses to lower labour costs findings reveal a lack of a pt wage differential public and private sector pt nurses are less likely to receive health care and pension coverage compared with full time ft nurses yet these pt ft nonwage compensation coverage differentials do not vary across sectors the nonwage findings are interpreted as suggesting that public sector health care employers are just as likely as private sector health care employers to benefit from cost savings associated with lower nonwage coverage for pt nurses

dynamic factor demands and the effects of energy price shocks a dynamic model is used to understand how sharp changes in energy prices affect investment behavior employment and energy use the authors discuss the theory behind their model selection model specifications estimation methods and data list parameter estimates and elasticities for the selected model and describe the simulations they conclude that 1 the data strongly reject the hypothesis of constant returns to scale within their specification of aggregate production 2 the data indicate adjustment costs on labor are small and 3 their results help reconcile some of the conflicting estimates of energy demand elasticities appearing in recent literature 23 references 3 figures 3 tables

distributional weights in environmental valuation and cost benefit analysis theory and practice abstract cost benefit analysis cba is built on the kaldor hicks efficiency criterion whereby projects that have aggregate positive net benefits are recommended even if those who lose are not compensated for their losses two kinds of problems can be identified with the use of the criterion first as income tends to affect monetary welfare changes positively the preferences of those with higher wealth have a larger weight in societal decision making second monetary welfare changes can be thought of as changes in real income which matter more for those with a lower initial wealth level both problems can be mitigated with distributional weighting despite their strong theoretical pedigree distributional weights have been largely neglected in practical cbas one exception being analyses in climate change economics we present the theory of distributional weighting and illustrate how weights can be applied empirically in an international environmental cba that deals with marine water quality improvements we show that different weighting schemes can result in different policy recommendations we also show that taking the income distribution within countries into account can change a country s willingness to participate in the water quality improvement program and that the income elasticity of willingness to pay wtp is an important indication of the direction of change

dynamic factor demands under rational expectations we model the industrial demands for structures equipment and blue and white collar labor in a manner consistent with rational expectations and stochastic dynamic optimization in the presence of adjustment costs but allowing generality of functional form we represent the technology by a translog input requirement function that specifies the amount of blue collar labor needed to produce an output level given quantities of three quasi fixed factors nonproduction workers equipment and structures a complete description of the production structure is obtained by simultaneously estimating the input requirement function and three stochastic euler equations we find adjustment costs are small in total but large on the margin and differ considerably across factors

government failure and market failure on the inefficiency of environmental and energy policy in this article we describe some important themes in energy and environmental policy there are two main reasons for our interest in these policies first such policies will likely be important in the coming decades as issues related to climate change and energy security come to the fore second there are important lessons to be learned from a careful review of the actual performance of energy and environmental policies we undertake a selective survey of the literature to highlight what is known about the efficiency of particular kinds of policies laws and regulations in these areas this paper makes three key contributions the first is to synthesize a large literature on energy and environmental policy in a way that can be easily digested by both non experts and experts the second contribution is to suggest that if history is a guide then we should not expect many interventions in these policy areas to come close to maximizing net economic benefits the third is to suggest what might be needed for the development of more efficient energy and environmental policies copyright 2010 oxford university press

efficient pollution regulation getting the prices right this paper argues for efficient environmental regulations that equate the mar ginal damage of pollution to marginal abatement costs across space the paper estimates the source specific marginal damages of air pollution and calculates the welfare gain from making the current sulfur dioxide allowance trading pro gram for power plants more efficient the savings from using trading ratios based on marginal damages are between 310 and 940 million per year the potential savings from setting aggregate emissions efficiently and from includ ing more sources of air pollution are many times higher jel h23 q53 q58

the earnings and employment of nurses in an era of cost containment previous research has shown that from the 1980s through the early 1990s nurses enjoyed substantial wage and employment gains that stemmed to some extent from increased labor demand using individual data for 1988 98 to compare nurses fortunes with those of college educated women and other workers in the health care industry the author documents that nurses experienced a decline in real wages beginning in the early 1990s at the same time that the skill premium for rns as reflected by the return to education and experience was increasing changes in measured characteristics and their returns explain very little of the decline consistent with the theory that the relative wage decrease was driven by a decline in the demand for rns and increased cost constraints the effects of hmo penetration are found to explain only a small part of the variation in wages across metropolitan statistical areas and across time

emission trading in europe with an exchange rate this paper explores the analytical and empirical properties of a new method for emission trading according to a fixed exchange rate the exchange rate is based on the ratios of the marginal costs of abatement in the optimal solution in order to account for the impact of the location of emission sources on the deposition it is shown that generally this system will not achieve the optimal solution and does not guarantee that environmental deposition constraints are not violated although total abatement costs are always reduced a routine was developed to mimic trading as a bilateral sequential process subject to an exchange rate in the example used results for so2 emissions in europe show that starting from a uniform reduction exchange rate trading achieves higher cost savings than one to one trading without achieving the cost minimum sulfur deposition targets are not violated since the initial emission allocation overfulfilled targets at many places the results are sensitive to pre trade emission levels the transaction costs the availability of information on potential cost savings and assumptions made on the behavior of trading partners

efficient pollution regulation getting the prices right comment the cost effectiveness of cap and trade emissions regulations has become widely accepted a 2009 proposal by muller and mendelsohn would replace conventional ton for ton trading with trading based on estimates of marginal damages by pollutant and by source this proposal faces difficulties arising from the negative marginal damage estimates neglected in muller and mendelsohn 2009 for nitrogen oxide no x emissions from many urban counties such estimates imply nonconvexities in air chemistry that complicate trading and could result in trades that increase emissions by both buyer and seller uncertainty in source specific damages also creates rent seeking opportunities and the potential for costly litigation jel h53 q53 q58

optimal trading ratios for pollution permit markets abstract we demonstrate a novel method for improving the efficiency of pollution permit markets by optimizing the exchange of emissions through trade under full information it is optimal for emissions to exchange according to the ratio of marginal damages under asymmetric information we derive necessary conditions for the marginal damage trading ratios to be optimal illustrate that the marginal damage trading ratios are generally not optimal and show how to improve efficiency using optimal trading ratios we calculate the optimal trading ratios for a global carbon market the gains from using optimal trading ratios rather than marginal damage trading ratios range from substantial to trivial which suggests the need for careful consideration of asymmetric information when designing permit markets