OPTIMAL ALLOCATION OF POLLUTION QUOTAS UNDER ASYMMETRIC INFORMATION

We consider, in this paper, the allocation of pollution quotas as a mechanism design problem. The first objective of pollution quotas is to reduce pollution, but raising revenue is an additional goal when taxation is distortionary. As there is a conflict between allocative efficiency and distributional concerns, rent extraction matters. We show that the level of pollution achieved under incomplete information is lower than under complete information. Each firm can receive more or less permits than under complete information. When the cost parameters are drawn from different probability distributions, the high abatement cost firms may be discriminated against.