ABSTRACT
Ronald Coase’s great insight on environmental policies is that once property rights are established for environment, environmental problems can be controlled in a decentralized fashion. This idea has led to the trade of emission permits for pollutants or environmentally unfriendly substances that has become very common nowadays. In emission permit trading, unlike Coase’s assumption of endogenous formation of a market, a market is designed by a government. As a result, the creation of a new market does not automatically lead to an efficient allocation, in particular because a government often fails to take into account the structural change of an economy that may occur in response to the creation of an emission permit market. If such a structural change is to occur, there is a large chance that the equilibrium targeted by a policy of tradable emission permits can never be achieved.
