| Abstract: | A pollution permit market is decentralized when firms are allowed to trade permits across time, regions or pollutants. Using a model in which firms have better information about their abatement costs than a regulator, we develop a comparative advantage formula that delineates whether or not pollution permit markets should be decentralized. When the damage from pollution is described by a separable function, the formula implies a simple sufficient condition for not allowing decentralization. |
