Tradable Permits for Common-Pool Resources: An Assessment

Abstract

Scholars often attribute deterioration in common-pool resources (CPRs) to ill-defined property rights and suggest privatization and tradable permit markets as a solution to the commons problem. CPRs are heterogeneous, differing in physical characteristics and use patterns. Regulating their use requires tailored policy solutions that cohere with these characteristics. This paper examines factors that contribute to a well-performing tradable permit market. While the literature offers rich empirical analyses of individual tradable permit markets, it has not provided an analytical framework enabling comparative analysis of these markets. This paper develops and employs an analytical framework for comparing across markets. The comparative analysis of market performance suggests that markets are not successful in all environmental problems and all demand situations. Further, it shows that even some markets frequently cited as exemplary successes have been that for nonmarket-related reasons. On the other hand, this comparative analysis identifies sources of success for markets that partial analytical frameworks would have predicted to fail.