Citizen participation in pollution permit markets

Should citizens lobby the government to reduce pollution permit endowments or should they participate directly in the market by purchasing and retiring permits'? We address this question in a two-stage model. In the first stage firms and citizens exert effort to influence the endowment of permits. In the second stage firms, and perhaps citizens, participate in the permit market. Even when citizens choose not to purchase permits, the possibility of doing so may affect the equilibrium. In our basic model, citizens choose not to purchase permits; this result can be reversed if permits are grandfathered. (c) 2005 Elsevier Inc. All rights reserved.