Mechanism Design: Pollution Control Under Imperfect Information

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School of Business | Bachelor's thesis
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Date

2022

Department

Taloustieteen laitos

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Mcode

Degree programme

Taloustiede

Language

en

Pages

24

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Abstract

The nature of negative environmental externalities is often such that market participants are not able to find their way to socially efficient allocation without an intervention from a regulatory agent. In this literature review, I explore market-based mechanisms which correctly price the externality and achieve an efficient outcome from the literature relating to mechanism design and environmental externalities. I will focus specifically on mechanisms which are designed to operate under incomplete information where the originator of the externality holds private information. Gaining access or otherwise indirectly revealing this information is necessary so that the regulator is able to derive what the efficient outcome is. I will present two such mechanisms: a classical solution by Kwerel (1977) and a modern solution by Montero (2008). Montero’s mechanism will serve as the main result of this thesis and I will study its features in more detail. Hopefully, I will manage to showcase its desirable features and convince the reader why it is an attractive option for solving environmental externality problems under incomplete information.

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Thesis advisor

Kitti, Mitri

Keywords

environmental externalities, mechanism design, imperfect information, pollution markets

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https://urn.fi/URN:NBN:fi:aalto-202301291664

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[kand] Kauppakorkeakoulu / BIZ (Open Access)