Individual transferable quotas in Cournot competition

We focus on the individual transferable quota system. We theoretically consider a product market in which firms engage in Cournot competition, but firms cannot set their quantities exceeding the quotas that held and can trade their initial quotas in a market. First, we show that an inefficient outcome may be realized and moreover inefficient trades may occur; that is, a firm may sell quotas to a less efficient firm. Second, we compare three regulatory policies, individual transferable quotas, specific taxes, and individual non-transferable quotas. Finally, we consider the effect of quota share limits on the Cournot equilibrium; we show that tightening these limits never increases social welfare and may, rather, decrease it. •We consider a Cournot competition model where firms cannot set their quantities exceeding the quotas that held and can trade their initial quotas in a market.•We show that an inefficient outcome may be realized and moreover inefficient trades may occur under Cournot equilibrium.•We compare three regulatory policy instruments; individual transferable quotas, specific taxes, and individual non-transferable quotas.•We consider the effect of quota share limits and show that tightening share limits never increases social welfare and may, rather, decrease it.