Strategic underproduction and ownership limit policy in cap-and-trade

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2024-3-15
Authors
Guo, Xinyu
Désiré Kédagni
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© Author(s) 2021
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Weninger, Quinn
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Economics

The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).

History
The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.

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1898–present

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  • Department of Economic Science (1898–1910)
  • Department of Economics and Political Science (1910-1913)
  • Department of Applied Economics and Social Science (1913–1924)
  • Department of Economics, History and Sociology (1924–1931)
  • Department of Economics and Sociology (1931–1967)

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Abstract
Cap-and-trade regulations enable tacit coordination and strategic underproduction of a regulators targeted cap. Strategic underproduction increases industry profits but lowers consumer surplus and creates cost inefficiency. These outcomes are prevented by limiting the quantity of production/emissions permits owned by individual firms. Ownership limits that are too stringent or too lax however can reduce welfare below levels that obtain without ownership limits. We demonstrate these results for the U.S. west coast groundfish fishery. Fishing permit ownership limits currently range between 2%-5% of total available permits. Welfare maximizing limits range between 10% - 50%. We predict a 25% reduction in welfare, due to foregone consumer surplus, under limits that are too lax. Results find that overly stringent ownership limits create scale inefficiency in groundfish production. Our results provide new directions for preventing market power inefficiency under cap-and-trade regulations.
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JEL Classification: L13, Q2. Length: 69 pages. Original Release Date: December 21, 2021; Revision: March 15, 2024.
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