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Walrasian prices in markets with tradable rights

Abstract

In this paper, we consider an exchange economy where there is an external restriction for the consumption of goods. This restriction is defined by both, a cap on consumption of certain commodities and the requirement of an amount of rights for the consumption of these commodities. The caps for consumption are imposed exogenously due to the negative effects that the consumption may produce. The consumption rights or licenses are distributed among the agents. This fact leads to the possibility of establishing license markets. These licenses do not participate in agents’ preferences, however, the individual’s budgetary constraint may be modified, leading to a reassignment of resources. Our aim is to show the existence of a Walrasian equilibrium price system linking tradable rights prices with commodity prices.

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Correspondence to Carlos Hervés-Beloso.

Additional information

This work was supported by the Spanish Ministerio de Ciencia e Innovación under project ECO2009-14457-C04-01, Xunta de Galicia, FEDER under project 10PXIB300141PR, Instituto Milenio Sistemas Complejos de Ingeniería and Fondecyt #1110716.

The authors are grateful to J. Correia da Silva, E. Moreno-García, P. Montero, and J. P. Torres-Martínez for their useful comments and suggestions.

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Hervés-Beloso, C., Martínez, F. & Rivera, J. Walrasian prices in markets with tradable rights. Econ Theory 49, 497–512 (2012). https://doi.org/10.1007/s00199-011-0635-5

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Keywords

  • Competitive equilibrium
  • Tradable licenses
  • Consumption rights
  • Externalities
  • Cap-and-trade program

JEL Classification

  • D51
  • D62
  • Q52