Economics Research Institute Study Paper
Utah State University Department of Economics
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We compare tradable permit markets and emission taxes as self-enforcing mechanisms 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 mechanisms that account 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, while joint emissions taxes are not.
Kaplan, Arthur J. and Silva, Emilson C.D., "An Efficient Mechanism to Control Correlated Externalities: Redistributive Transfers and the Coexistence of Regional and Global Pollution Permit Markets" (2002). Economic Research Institute Study Papers. Paper 256.