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An Efficient Mechanism To Control Correlated Externalities: Redistributive Transfers And The Coexistence Of Region And Global Pollution Permit Markets, Arthur J. Caplan, Emilson C.D. Silva

Applied Economics Faculty Publications

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.