Fees and the efficiency of tradable permit systems: an experimental approach

Baldursson, Fridrik M. and Sturluson, Jon Thor (2008): Fees and the efficiency of tradable permit systems: an experimental approach.

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: A) no fee imposed; B) a fixed tax per permit; C) partial retraction of permits which are reissued by auction. We regard B and C as two ways of imposing fees. 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 reduces efficiency compared to both alternative treatments. Apparently, subjects’ decision making is affected by the imposition of fees, but it matters how such costs are presented or framed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Tradable permits, taxation, auctions, efficiency, experimental economics
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q2 - Renewable Resources and Conservation > Q22 - Fishery ; Aquaculture; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q2 - Renewable Resources and Conservation > Q25 - Water; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy

References

Anderson, C.M., & Sutinen, J.G. (2006). The effect of initial lease periods on price discovery in laboratory tradable allowance markets. Journal of Economic Behavior and Organization, 61(2), 164-180.

Arnason, R., & Gissurarson, H. H. (Eds.) (1999). Individual Transferable Quotas in Theory and Practice. Reykjavik: The University of Iceland Press.

Baldursson, F. M., & Fehr, N.-H. M. v. d. (2004). Price volatility and risk exposure: on market-based policy instruments. Journal of Environmental Economics and Management, 48(1), 682-704.

Bovenberg, A.L., & Goulder, L.H. (1996). Optimal environmental taxation in presence of other taxes: general-equilibrium analysis. American Economic Review, 86(4), 985-1000.

Camerer, C.F., & Hogarth, R.M. (1999). The effects of financial incentives in experiments: a review and capital-labor-production framework. Journal of Risk and Uncertainty, 19(1-3), 7-42.

Cason, T.N., & Gangadharan, L. (2006). Emissions variability in tradable permit markets with imperfect enforcement and banking, Journal of Economic Behavior and Organization, 61(2), 199-216.

Coase, R. (1960). The problem of social cost, Journal of Law and Economics 3, 1-44.

Fischbacher, U. (2007). Zurich Toolbox for Ready-made Economic Experiments. Experimental Economics 10(2), 171-178.

Hahn, R.W., & McGartland, A.M. (1989). The political economy of instrument choice - An examination of the United States role in implementing the Montreal Protocol. Northwestern University Law Review, 83(3), 592-611.

Hepburn, C., Grubb, M., Neuhoff, K., Matthes, F., & Tse, M. (2006), Auctioning of EU ETS phase II allowances: how and why?, Climate Policy, 6, 137-160.

Kagel, J.H., & Levin, D. (2001). Behavior in multi-unit demand auctions: experiments with uniform price and dynamic Vickrey auctions. Econometrica, 69(2), 413-454.

Kahneman, D., Knetsch, J.L., & Thaler, R.H. (1991). The endowment effect, loss aversion, and status quo bias: anomalies. Journal of Economic Perspectives, 5(1), 193-206.

Kling, C.L., & Zhao, J. (2000). On the long-run efficiency of auctioned vs. free permits. Economics Letters, 69, 235-238.

List, J.A. (2004). Neoclassical theory versus prospect theory: evidence from the marketplace. Econometrica, 72(2), 615-625.

Matthiasson, Th. (2001). The Icelandic debate on the case for a fishing fee; a non-technical introduction. Marine Policy, 25, 303-312.

Montgomery, W.D. (1972), Markets in licenses and efficient pollution control programs. Journal of Economic Theory, 5, 395-418.

Murphy, J.J. & Stranlund, J.K. (2006). Direct and market effects of enforcing emissions trading programs: an experimental analysis, Journal of Economic Behavior and Organization, 61(2), 217-233.

Oates, W.E. and P.R. Portney (2003). The political economy of environmental policy in K-G Mäler and J R Vincent (eds), The Handbook of Environmental Economics, Vol I, Elsevier Science, Amsterdam.

Pezzey, J.C.V. (2003). Emission taxes and tradable permits: a comparison of views on long-run efficiency, Environmental and Resource Economics, 26, 329-342.

Phillips, O.R., Battalio, R.C., & Kogut, C.A. (1991). Sunk and opportunity costs in valuation and bidding. Southern Economic Journal, 58(1), 112-128.

Porter, D.P., & Smith, V. L. (1995). Futures contracting and dividend uncertainty in experimental asset markets. Journal of Business, 68(4), 509-541.

Porter, D.P., & Smith, V.L. (2003). Stock market bubbles in the laboratory. Journal of Behavioral Finance, 4(1), 7-20.

Smith, V.L. (1962). An experimental study of competitive market behavior. Journal of Political Economy, 70, 111-137.

Smith, V.L., Suchanek, G.L., & Williams, A.W. (1988). Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica, 56(5), 1119-1151.

Stavins, R.N. (1995). Transaction costs and tradable permits. Journal of Environmental Economics and Management, 29(2), 133-148.

Stavins, R.N. (2003). Experience with market-based environmental policy instruments ín K.-G. Mäler & Vincent, J.R. (Eds.), The Handbook of Environmental Economics, Vol I, Elsevier Science, Amsterdam.

Sunder, S. (1995). Experimental Asset Markets: A Survey. In J.H. Kagel & A.E. Roth (Eds.), The Handbook of Experimental Economics. Princeton, NJ: Princeton University Press.

Tversky, A. and D. Kahneman (1981). The framing of decisions and the phychology of choice. Science, 211(4481), 453-458.

Thaler, R. (1980). Towards a positive theory of consumer choice. Journal of Economic Behavior and Organization, 1, 39-60.

Weitzman, M.L. (1974). Prices vs. Quantities. Review of Economic Studies, 41(4), 477-491.