Market power, private information, and the optimal scale of pollution permit markets with application to North Carolina's Neuse River

► We analyze the interplay of market power, private information, and optimal scale in pollution permit markets. ► Market power and private information may lead to lower total costs than competition. ► The performance of the market is not very sensitive to market structure. ► We determine the optimal scale for water quality trading in North Carolina's Neuse River. ► The optimal scale generates 1.55 million dollars per year in cost savings relative to typical regulation.