Marketable Pollution Permits in Oligopolistic Markets with Transaction Costs

In this paper, we present a variational inequality framework for the modeling, qualitative analysis, and computation of equilibrium patterns in multiproduct, multipollutant oligopolistic markets with marketable pollution permits in the presence of transaction costs. The model deals explicitly with spatial differentiation and also guarantees that the imposed environmental quality standards are met through the initial allocation of licenses. An algorithm is proposed, with convergence results, to compute the profit-maximized quantities of the oligopolistic firms' products and the quantities of emissions, along with the equilibrium allocation of licenses and their prices. Numerical examples are included to illustrate this approach.