Perman, Ma, Common, Maddison and McGilvray

Chapter 7

Page 249, beginning of the first line:

reference to "(Section 7.5)" should read instead as "Section 6.5.4 in Chapter 6)"

(Many thanks to Michael Fung for bringing this mistake to my attention).

This correction refers to a PowerPoint slide set that accompanies Chapter 7 of the textbook: On the second slide, the 3rd bullet reads: “Uncertainty: usually taken to mean situations in which the set of possible outcomes is known but probabilities can be attached to each possible outcome.”  The underlined word should be cannot. (Many thanks to Professor James Stodder, Lally School of Management, Rensselaer Polytechnic Institute, for bringing this mistake to my attention).

Professor Stodder also raises a more general matter (concerning Chapter 6 and also by implication Chapter 7) which I will address in a later edition of this text, but will flag up now at this point. The quote below is taken verbatim from Jim's e mail to me:

"By the way, I have a question about Chap. 6’s point on the knowledge necessary to credibly enforce emissions trading for a NUMP (non-uniformly mixing pollutant), although I haven’t formulated it in a rigorous way yet.  It seems to me, however, that while you are right that the central authority does not need as much information to auction permits as it would need to set taxes, it would in fact need a very similar amount to enforce firms’ ownership of said permits in the proper amounts and combination.  

The real problem in both systems, tax or permit, is enforcement.  As you note in your Appendix to Chap. 6, detailed abatement cost for each firm may not be needed if one can establish the shadow price iteratively, a la the famous Walrassian auctioneer.  But isn’t this equivalent to establishing the correct quantity iteratively if one is setting total permit levels?

A permit setting authority has to ensure each firm has the number of permits that matches the total pollution it is emitting, not only by type, but by the predicted ex post disbursement of that pollutant – since these will all sell at different rates.  This is not so different from the enforcement of the requisite taxes paid at different rates on each of those pollutants.  Each implies detailed monitoring of the firms’ quantity (and also possibly, timing) of various emissions, and a comprehensive disbursement mapping. 

I’m not claiming, just to be clear, that the two processes are exactly equivalent in bureaucratic cost terms – how it works out in practice is not at all clear to me.  But it seems to me that these costs would be broadly similar, at least at this level of analysis."