Tradeable Emission Permits in Oligopoly

The paper considers an oligopolistic industry in which pollution is a by-product of production. Firms are assumed to have emission permits that restrict the amount that they pollute. These permits are assumed to be tradeable and the paper discusses a structure in which the same set of firms operates both in the product market as well as in the pollution permits market. The paper demonstrates that in such a structure allowing trade in emission permits is not necessarily beneficial. In particular it may lead to the choice of inferior production and abatement technologies, it may lead to a market equilibrium with lower output rates and higher prices and it may result in a shift of production from a low cost to a high cost firm.