DESIGNING MORE EFFICIENT MARKETS - LESSONS FROM LOS-ANGELES SMOG CONTROL

Market-based approaches for environmental protection are beginning to take root around the world. This article attempts to improve our understanding of the performance of environmental markets by constructing and evaluating an information base on trades in Los Angeles, which includes the first detailed data on trading prices. The analysis suggests that trading activity has been shaped by the detailed regulations governing the market, In addition, transaction costs have played a crucial role. We argue that the move toward adopting market-based approaches for environmental protection needs to be accompanied by a vigorous effort to assess the properties of these systems as they are actually implemented.