An Efficient Mechanism to Control Correlated Externalities: Redistributive Transfers and the Coexistence of Region and Global Pollution Permit Markets
Journal of Environmental Economics and Management
We examine joint tradable permit markets as a self-enforcing mechanism to control correlated externality problems. By “correlated” we mean multiple pollutants that are jointly produced by a single source but which simultaneously cause differentiated regional and global externalities (e.g. smog and global warming). By “self-enforcing” we mean a mechanism that accounts for the endogeneity that exists between competing jurisdictions in the setting of environmental policy within a federation of regions. We find that joint domestic and international permit markets are Pareto efficient for a wide class of preferences.
Caplan, Arthur, J., and Emilson C.D. Silva. (2005) "An Efficient Mechanism to Control Correlated Externalities: Redistributive Transfers and the Coexistence of Regional and Global Pollution Permit Markets." Journal of Environmental Economics and Management, 49(1), 68-82.