Abstract
The example demonstrates the difficulty of using marketable pollution rights to achieve an optimal level of pollution. When the presence of a pollutant introduces nonconvexities into the production sets of nonpollutors who are allowed to buy and sell permits, there will be no unique competitive equilibrium in the market for pollution rights. The actual equilibrium will depend upon the number of permits issued and need not represent the optimal pollution level. As Tietenberg argued in his original article (1980), transferable discharge permits can be shown to be efficient only in the sense of providing a least-cost method of maintaining a given level of pollution. 5 references, 1 figure.
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