Approaching Equilibrium with Tradable Share Permits

Abstract

This paper shows that a simple scheme of non-linear taxes coupled with tradable pollution permits can secure the .rst best outcome even in absence of information about abatement costs. Evidence of the existence of a Pareto optimal Nash equilibrium is given. Di¤erential system theory and stochastic approximation are used to prove that the outcome is globally and locally stable. Equilibrium is reached after repeated play. At each round agents make myopic steps and form local approximations, restricting their attention to one variable at any stage. The same procedure also applies also when stochastic elements are involved.