Individual transferable quotas in Cournot competition

- 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.

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.