Transaction Costs and the Performance

Tradeable-permit systems are at the center of current interest and activity in market-based reforms of environmental policy, because these systems can offer significant advantages over conventional approaches to pollution control. Unfortunately, claims made for their relative costeffectiveness have often been exaggerated. Transaction costs, which are ubiquitous in these markets, reduce trading levels and increase abatement costs. Furthermore, in some cases, equilibrium permit allocations and hence aggregate control costs are sensitive to initial permit distributions, providing an efficiency justification for politicians' typical focus on permit distribution mechanisms. These and other findings are consistent with available empirical evidence on the performance of pollutioncontrol markets. TRANSACTION COSTS AND THE PERFORMANCE OF MARKETS FOR POLLUTION CONTROL Robert N. Stavins*