The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Pollution Permits

  • Ted Gayer
Reference work entry


Government can reduce pollution by issuing permits to polluters in numbers below existing emission levels. Under a tradable permit programme, a firm with high abatement costs can buy permits from another firm with low abatement costs, leading to a reduction in the total cost of abating relative to a system where reduction levels are strictly assigned. For tradable permits to work effectively, the emissions must come from discrete point sources and be relatively easy to monitor. Aside from issuing the permits, the government’s role is to enforce compliance and establish optimal penalties for non-compliance.


Auction hot spot Carbon emissions Clean Air Act Amendments of 1990. Coase Theorem Externalities Market failure Pollution permits Property rights Transaction costs 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Ted Gayer
    • 1
  1. 1.