Fees and the Efficiency of Tradable Permit Systems: An Experimental Approach

Fridrik Mar Baldursson, Jon Thor Sturluson

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

The paper presents the results of an economic experiment in which the effects of fees on allocative efficiency of tradable utilization permits (e. g. pollution permits) are explored. Laboratory subjects (university students) play the roles of firms whose generic product requires a specific input or permits. Scarcity is exogenously introduced by a fixed supply of tradable production permits. Three treatments are compared: No fee imposed (N); a fixed tax per permit (T); and partial retraction of permits and subsequent redistribution by auction (A). Treatments T and A represent two different ways of imposing fees, which are designed to be revenue equivalent. Our results indicate that, after controlling for deviation of permit prices from a prediction based on fundamentals, fees have an impact on distribution of permits. Interestingly, a fixed tax enhances efficiency compared to the case of no fees while retraction and reallocation by auction tends to reduce efficiency. Apparently, subjects' decision making is affected by the imposition of fees, but how and to what extent depends on the method used.

Original languageEnglish
Pages (from-to)25-41
Number of pages17
JournalEnvironmental and Resource Economics
Volume48
Issue number1
DOIs
Publication statusPublished - Jan 2011

Other keywords

  • Auctions
  • Efficiency
  • Experimental economics
  • Taxation
  • Tradable permits

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