Dear Armchairs, in connection with the implementation of tradeble permit policy there is a discussion about the initial allocation of permits (free allocation vs. auction). Some emphasize the political advatages of freely allocated permit systems, because of the conveyance of scarcity rents to the private sector. But others see free allocation problematic in normative, efficency terms and argue that auctioning yields revenues that can be used to finance reductions in pre-existing distortionary taxes (i.e. Fullerton, Metcalf 1997). Furthermore free allocation possibly involves a lot of rentseeking costs (similar to the efficency loss of free allocation of land in the early US-History?). Although I see the latter case theoretical convincing I raise some objections: First, the efficency argument of auctioning acts on the assumption that revenues will be used to reduce taxes. But I doubt it if I consider political reality. Usually more revenues means more budget and public spending. In particular in the case of environmental taxes revenues are used to finance public pension funds (Germany) or subsidies for renewable energies or other projects to protect the environment, both market distorting. Second, as long auctioning of every permit corresponds to a tax on every unit of emission firms pay over the range of emissions more than the social damage of emissions (in the case of a normal, upward sloping marginal damage curve). This welfare distribution from firms to state affect in the long term a inefficient small pruduction of goods in regulated industries (Oates, 1982). Thatswhy I' m sceptical towards auctioning and I lean to prefer a free allocation via lottery, to avoid some rentseeking. What do you think about this problem?
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