Tradable emission permit system for urban motorists: The neo-classical standard model revisited

This article deals with the feasibility of a tradable emission permit system (TEPs) for urban motorists. The objective is to develop a new microeconomic theoretical model to reduce urban pollution. We suppose that the city's regulating authority sets up a tradable emission permit system based on the number of kilometres covered by private cars. By the use of a Constant Elasticity of Substitution (CES) function, we determine the equilibrium under an environmental constraint and analyse the effects of a TEPs on social welfare. The aim is to find the optimal quantity of permits leading to the desired environmental objective. The analytical and numerical results of the model show the instrument's feasibility and efficiency. An important variable in the model must be taken into account: the knowledge of environmental damage. This variable will clearly influence the tool's success.