The Efficiency of ITQs in the Presence of Congestion Externalities: Reply to Danielsson

Professor Danielsson (this journal 2000) argues that congestion externalities are solved if individual transferable quotas (ITQs) are introduced. This is in direct contrast to my own research (Boyce 1992, Corollary 1, p. 399). Danielsson raises an interesting question about how congestion externalities should be modeled. However, I argue that my own result is fundamentally correct, based on the assumptions I made. Furthermore, my paper defined congestion externalities in a manner that is consistent with the literature, while Danielsson does not. In addition, the manner in which Danielsson specifies congestion externalities is indistinguishable from a pecuniary externality—thus it is hardly surprising that he finds that ITQs simultaneously solve both the congestion and common property externality problems.