Auctions and Alternative Procedures for Allocating Pollution Rights

Abstract

This paper considers two different types of auctions which the government could use to sell discharge rights: (1) an auction where rights are sold for a single clearing price, and (2) a special type of discriminating auction that discourages strategic manipulation of bids by individual dischargers. Based on both theoretical and practical considerations, there appears to be a fundamental trade-off between reducing the financial burden of rights purchases and eliminating the incentives for strategic behavior. Very few discharges in either case study would have lower expenses under government sales of rights than under uniform treatment. The simulations also suggest that there may be opportunities for strategic behavior under nonincentive-compatible procedures because of small numbers of dischargers, despite its problems with respect to incentive compatibility, the right allocation approach of free distribution followed by exchange may offer the most desirable package of features. This approach can yield dischargers savings over the expenses of present uniform regulations as well as provide incentives for efficient allocation of treatment efforts. 25 references, 1 figure, 5 tables.