The literature on the use of economic incentives to deal with environmental problems makes a persuasive case that policy tools such as emissions taxes or tradable emission permits have important potential advantages compared to source-specific technical standards. Despite the apparent advantages of incentive-based methods, some questions have been raised about the feasibility of their implementation. This thesis is part of a larger research project that addresses these feasibility questions. The principal task undertaken here is to gather the information needed to evaluate the applicability of a marketable permit scheme for dealing with a particular pollution problem (sulfur oxides emissions) in a particular place (the Los Angeles Basin).
The analysis begins with a description of the concept of marketable permits and how it differs from existing regulatory approaches. An agenda for research on transferable permits is outlined. Some of the potential problems in making the transition from the current approach to a market approach are then discussed.
The next part of the analysis focuses on some of the key empirical issues. The effects of changing the natural gas supply are quantified. Static efficiency gains in moving from the status quo to a market approach are also estimated. This is followed by an analysis of the gains from having several markets corresponding to different receptor points. A key result is that the payoff to having several markets, when measured in terms of abatement cost savings, is quite small for this particular example.
The final part of the analysis is devoted to a discussion of theoretical issues that might arise in designing a market. First, the comparative statics results relating to the control of sulfur oxides emissions are derived. Next, a more general model is used to address the issue of how a firm might influence the equilibrium achieved in the permits market. Finally, some issues in identifying cost-effective solutions to problems with multiple objectives are addressed.
