Quantity Constrained Duopoly With A Market For Quotas Pubblico

Abstract

As the control of common pool resources becomes increasingly important, there have been many proposed ways to manage these resources. One such way is through an individual transferable quota (ITQ) system where each firm is allocated a certain amount of quotas that can then be traded in a market for quotas. The goal of this paper is to examine how quota markets work in principle, in the absence of externalities. Working with a duopoly situation, I create two different models. The first model assumes that each firm has different, but constant, marginal costs. In this model, I find that it is always in the firms' best interest to trade quota, although the exact price at which quota is traded is indeterminate. The second model of this paper examines the case in which each firm has increasing marginal costs. When marginal costs are increasing, there is an endogenously determined price and quantity at which quota is traded. Furthermore, it is shown that there is a welfare-maximizing quota level for different demand and cost parameters. Understanding the theoretical basis of a quota market and its impact on social welfare in a duopoly situation, even without externalities, helps to provide insight on how effective an ITQ system is at managing common pool resources.

Table of Contents

Introduction .......................................................................... 1

Model 1: A Basic Duopoly Model with Constant Marginal Costs ..... 4

Duopoly Without and With Quotas ............................................ 4

Duopoly with a Market for Quota .............................................. 7

Model 2: A Basic Duopoly Model with Increasing Marginal Costs .. 11

Duopoly Without and With Quotas ........................................... 11

Duopoly with a Market For Quotas ........................................... 12

Conclusion and Extensions ..................................................... 21

Works Cited ......................................................................... 25

About this Honors Thesis

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School	Emory College
Department	Economics
Degree	BA
Submission	Honors Thesis
Language	English
Research Field	Economics, General Agriculture, Fisheries and Aquaculture Economics, Theory
Parola chiave	Cap and Trade Individual Transferable Quota Externalities Quota Trading ITQ
Committee Chair / Thesis Advisor	Banerjee, Shomu, Emory University
Committee Members	Yandle, Tracy, Emory University Francis, Andrew, Emory University

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