Abstract
If the measurement of production in a commons is accurate and precise, it is possible to design a tradable permit program such that, under a fairly general set of conditions, the market equilibrium is efficient for the given aggregate permit level and everyone is better off after the permit program than before. Often, implementation of a tradable permit system is postponed or never undertaken because an inexpensive technology able to provide accurate and precise measurements does not exist. However, there often is an inexpensive technology which is accurate but not precise. I study the possibilities for the design of a tradable permit system when the measurement technology involves an imprecise, indirect measure of production that contains statistical uncertainty. To the best of my knowledge, this has not been studied before.
As one might expect, imprecise measurement can lead to inefficiency and prevent voluntary participation. But there are positive results. If measurement errors are proportional to use, it is possible to design so that aggregate output is efficiently allocated. Also, it is possible to calculate a set of individual lump-sum subsidies to attain voluntary participation.
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Notes
- 1.
I will side-step adverse selection incentive problems by assuming competitive behavior on the part of the economic agents.
- 2.
See also Zekri (2009) for a deeper discussion of this method.
- 3.
See Water Education Foundation (2015) for a discussion of this method.
- 4.
- 5.
The model would be essentially the same if the producers were choosing an input.
- 6.
I use the following notation for derivatives of functions: f x = ∂f(x, y, z)∕∂x and f xy = ∂ 2 f(x, y, z)∕∂x∂y. The index i is the name of a producer and is not a variable.
- 7.
Of course, P could depend on more than just v i. For example, P could depend on the percentage violation so that the penalty is P(q i∕l i). But when ∂P∕∂q i + ∂P∕∂l i ≠ 0, permit market equilibria will generally not be efficient. Thus, the design choice is usually P(v i).
- 8.
This is rarely true in practice. Even if there is a large number of producers, most extant permit markets are disorganized and thinly traded. They tend to violate the Law of One Price and, therefore, traders’ behaviors are not really competitive. There are ways to design a trading mechanism to avoid this, but that rarely happens. I leave the design of those markets to another paper.
- 9.
\( P_v(0^+)=lim_{x\rightarrow 0^+}P_v(x)\).
- 10.
The proofs are omitted since they are standard and straightforward. For details see, e.g., Ledyard (2018).
- 11.
Since it is rare that such a distribution is unique, there may still be serious political bargaining over the allocation of L.
- 12.
If the penalty is weak so that L < Q V(P v(0+)), then \(v^*_i >0\) and Q ∗ > L. In this case, q ∗ is not efficient given L. But q ∗ will be efficient given Q ∗. See, e.g., Malik (1990).
- 13.
For details, see, e.g., Ledyard (2018).
- 14.
See Ledyard (2018).
- 15.
Differences across producers might occur in water markets for different crops or different irrigation technologies, and in fishing markets for different gear types. These differences would affect the efficiency results below to some extent. I leave it to the reader to work out those implications.
- 16.
This ensures that w i ≥ 0. If errors are proportional to output with h(q) = τq for some τ > 0, then this will be true if \(\tau \underline {\delta } \le 1.\)
- 17.
This is drawn for the case that \(\frac {[\sum _i h(q_i)]}{N} >1\). If that is not true, then V (p) rotates in a counter-clockwise direction.
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Acknowledgements
I thank the Max Factor Family Foundation in partnership with the Jewish Community Foundation of Los Angeles for its financial support of this project.
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Ledyard, J.O. (2019). Design of Tradable Permit Programs Under Imprecise Measurement. In: Trockel, W. (eds) Social Design. Studies in Economic Design. Springer, Cham. https://doi.org/10.1007/978-3-319-93809-7_8
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