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1、MARKET POWER AND TRANSFERABLE PROPERTY RIGHTS*ROBERT W. HAHNThe appeal of using markets as a means of allocating scarce resources stems in large part from the assumption that a market will approximate the competitive ideal. When competition is not a foregone conclusion, the question naturally arises
2、 as to how a firm might manipulate the market to its own advantage. This paper analyzes the issue of market power in the context of markets for transferable property rights. First, a model is developed that explains how a single firm with market power might exercise its influence. This is followed b
3、y an examination of the model in the context of a particular policy problemthe control of particulate sulfates in the Los Angeles region.I. INTRODUCTIONThe idea of implementing a market to ration a given quantity of resources is by no means novel. Working examples include markets for taxi medallions
4、 and liquor licenses. Suggested ap- plications for the use of a market approach abound in the eco- nomics literature, especially in the fields of air and water pol- lution. Why has the idea of setting up a market in transferable property rights received so much attention? One key reason, and the rea
5、son which motivates this paper, is that such markets have the potential to achieve a given objective in a cost-effective man- ner. Whether this potential is realized depends, among other things, on the design of the market and the extent to which individual firms can exert a significant influence on
6、 the market. The purpose of this paper will be to explore how the initial distribution of property rights can lead to inefficiencies. Section II develops the basic model for the case in which one firm can influence the market. Section III considers a potential application of the model. The results o
7、f the theoretical analysis are then*The work reported here was supported by the Environmental Quality Lab- oratory at Caltech and the California Air Resources Board. I would like to thank Jim Quirk, Roger Noll, Jennifer Reinganum, and Robert Dorfman for providing helpful comments. The views expresse
8、d herein, including any remaining errors, are solely the responsibility of the author.1. Tietenberg 1980 provides a comprehensive survey of the application of marketable permits to the control of stationary source air pollution. A general list of references to potential applications in air and water
9、 pollution is providedin the study by Anderson et al. 1979.1984 by the President and Fellows of Harvard College. Published by John Wiley (Q i) + P = 0.This merely says that price takers will adjust the quantity used Qi until the marginal abatement cost equals the equilibrium price P.2 Equation (2) i
10、mplicitly defines a demand function Q i(P), which is downward sloping on 0,L for i = 2, . . . , m. Furthermore, note that the number of permits the ith price-taking firm will use is independent of its initial allocation of permits. The analysis of the firm with market power is less straight- forward
11、. , Begin by defining an abatement cost function Cl(Qi), where C1 0. This says that the firm with market power faces increasing marginal abatement costs. Firm 1 has the power to pick a price that will minimze its expenditure on abate- ment costs and permits subject to the constraint that the market
12、clear. Formally, the problem is to(3)minimize C1(Q1) + P(Q1 Q?) P m subject to Q=L EQ AP). =z2. The assumption of increasing marginal abatement cost implies that thefirm attains a regular minimum in solving the problem.at Harvard University Library on December 5, 2012http:/qje.oxfordjournals.org/Dow
13、nloaded from 756QUARTERLY JOURNAL OF ECONOMICSSubstituting the constraint into the objective function and dif- ferentiating yield the following first-order condition for an inte- rior minimum:(4) ( Ci P) E Qi + Qi(P) (2) 0.i=2 i=2Equation (4) reveals that the only case in which the marginal cost of
14、abatement C1 will equal the equilibrium price is when firm ls distribution of permits just equals the amount it chooses to use. In effect, this says that the only way to achieve a cost- effective solution, where marginal abatement costs are equal for all firms, is to pick an initial distribution of
15、permits for firm 1 which coincides with the cost-minimizing solution. This gives rise to the following result:PROPOSITION 1. Suppose that there is one firm with market power. If it does not receive an amount of permits equal to the num- ber that it holds in equilibrium, then the total expenditure on
16、 abatement will exceed the cost-minimizing solution.The key point to be gleaned from the analysis is that the distri- bution of permits matters, with regard not only to equity consid- erations but also to cost. Traditional models of such markets view problems of permit distribution as being strictly an equity issue.3 With the introduction of market power, it was shown that the distribution of permits may also impinge on efficiency consider- ations. The next logical que
