Abstract
Abstract This essay extends the theoretical model of Montero (2004) and applies it to Santiago, Chile's total suspended particulate (TSP) program to compare the actual performance of this program with that of a hypothetically equivalent standards policy. In doing so, the production and abatement cost characteristics of affected sources and the regulator's perception about environmental damages are first recovered. Based on these estimates, it is shown that permits have provided large cost savings but also lead to higher emissions; about 6% higher than what would have been observed under an equivalent standards policy. However, the welfare loss from higher emissions is only 8% of the welfare gain from lower abatement and production costs. The theoretical and empirical results make a strong case for the wider use of pollution permits, even in situations where emissions are imperfectly observed.
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