Further Results on Permit Markets with Market Power and Cheating

Abstract This paper examines a market for pollution permits in which one firm has market power and one or more firms is noncompliant. I show that the firm with market power may choose to hold more permits than it needs, effectively retiring permits from the market. I also show that some noncompliance may be socially desirable because it can mitigate the distortion caused by market power. Similarly, some degree of market power may be socially desirable because it can, in turn, mitigate the distortion caused by noncompliance.