ABSTRACT
The welfare consequences of moving from a command-and-control approach to pollution control to an emission credit trading program that attains the same environmental quality are shown to depend on the competitiveness of the output markets in which polluting firms compete. Emission credit trading programs have been advanced as a more cost-effective way of attaining the pollution reduction goals achieved under command- and-control regulations, which specify limits on how much of some pollutant manufacturers may emit in the production of a good. The chapter explains the output market in which firms participate is competitive. Enthusiasm for emission credit trading programs should be tempered with considerations of competition in the relevant output markets. The chapter shows that if the output market in which polluters compete is oligopolistic, introduces of trading may reduce welfare by shifting production from low-cost firms to high-cost firms.
