Question

Use a diagram to discuss whether you agree or disagree with the following statement.

“In an emission trading scheme, a unique, efficient and equitable allocation of emission permits will be achieved regardless of how emission permits are initially allocated.”

Answer 1

Emissions trading is an  approach to control pollution by providing economic incentives. Yes, I agree with the statement.

The Coase theorem states that if there are sufficiently low transaction costs, bargaining will cause a Pareto efficient outcome no matter the initial allocation of property.

A permit may be a right to supply a particular amount of a negative externality, like pollution.

Permits are traded among firms.

Firms that are ready to cheaply reduce production of the externality can sell permits to firms that are unable to form such reductions and are willing to buy the permits.

Regardless of the initial allocation of permits, the marketplace for permits achieves an outcome that's more efficient for society.

Hence, market will reach to an efficient outcome regrdless of how property rights are defined.