Common Tragedies

Thoughts on Environmental Economics

The oft underappreciated virtue of auctions

Posted by Rich Sweeney on January 28, 2008

It’s information yo. Lately there’s been a lot of political attention paid to the costs/benefits of government permit allocation. However, these discussions have focussed almost entirely on equity considerations and the perceived fairness of outcomes. Little is said about the bureaucratic costs of allocating permits, regardless of what metric you use to do so.

Take carbon emissions. Petr Zapfel, Coordinator for EU Carbon Markets and Energy Policy, just gave a talk here. When asked about allocating based on emissions, he almost shuddered at the informational burden of doing this correctly. Every company would send in their information, then bureaucrats would verify it, publish the findings, and come up with some metric for doling out permits. Such an approach would require an enormous amount of time and man-power.

Instead, the government could just set up an auction, and allow the market to do the leg work. Prices are the most valuable informational tool man has ever come up with, and ignoring this creates a host of unnecessary costs. Moreover, as Dallas pointed out, and Rep. Markey agreed, at he end of his testimony the other day, auctions are actually relatively easy to administer (just look at the electromagnetic spectrum).

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One Response to “The oft underappreciated virtue of auctions”

  1. [...] permits is a hot-button topic. Common Tragedies breaks down auctions versus free giveaways in a pair of posts, while Grist finds that power companies will charge the same whether they get free permits [...]

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