| Trading of pollution permits with banking and borrowing can achieve an optimal distribution of abatement across agents and time. However, when the environmental constraint is binding under imperfectly observed abatement practices, there is an incentive for sources to misrepresent their activities. This cheating can erode the efficiency of a permit system in achieving an environmental standard, but it is shown that this incentive to cheat causes similar efficiency losses in a command-and-control mechanism employing a uniform reduction policy. |
