Enforcing Transferable Permit Systems in the Presence of Market Power

We derive an enforcementstrategy for a transferable permit system inthe presence of market power that achievescomplete compliance in a cost-effective manner.We show that the presence of a firm with marketinfluence makes designing an enforcementstrategy more difficult than enforcing aperfectly competitive system. We alsore-consider Hahn's (1984) suggestion that afirm with market influence should be allocatedpermits so that it chooses to not participatein the permit market. When enforcement and itscosts are taken into account, Hahn's suggestiondoes not hold except in a very special case.