Selecting permit allocation rules for agricultural pollution control: a bargaining solution

One of the primary justifications for using transferable permits for pollution control is that they achieve a given level of emission reduction at the lowest cost. Although the initial allocation of pollution permits may have no impact in terms of efficiency, it does have a significant impact on equity. In this paper, we examine a variety of permit allocation rules for a small catchment in South West England. An asymmetric Nash bargaining framework is employed to characterise agents’ co-operative behaviour and to explain their likely preferences over permit allocation rules. The results indicate that the preferred allocation scheme depends upon the relative bargaining power of the agents. Furthermore, some potential links between ex-ante and ex-post equity criteria were also discussed.