▪ Abstract  For years economists have urged policy makers to use market-based approaches such as cap-and-trade programs or emission taxes to control pollution. The sulfur dioxide (SO2) allowance market created by Title IV of the 1990 U.S. Clean Air Act Amendments represents the first real test of the wisdom of economists’ advice. Subsequent urban and regional applications of nitrogen oxides (NOx) emission allowance trading took shape in the 1990s in the United States, culminating in a second large experiment in emissions trading in the eastern United States that began in 2003. This review provides an overview of the economic rationale for emissions trading and a description of the major U.S. programs to reduce SO2 and NOx pollution. We evaluate these programs along measures of performance, which include cost savings, environmental integrity, and incentives for technological innovation. We offer lessons for the design of future programs including, most importantly, those to reduce carbon dioxide.

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A Ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an economy with incomplete markets. We develop a method that uses second order approximations of Ramsey policies to obtain formulas for conditional and unconditional moments of government debt and taxes that include means and variances of the invariant distribution as well as speeds of mean reversion. The asymptotic mean of the planner's portfolio minimizes a measure of fiscal risk. We obtain analytic expressions that approximate moments of the invariant distribution and apply them to data on a primary government deficit, aggregate consumption, and returns on traded securities. For U.S. data, we find that the optimal target debt level is negative but close to zero, the invariant distribution of debt is very dispersed, and mean reversion is slow.

In developing countries, urban clusters of manufacturers which are "informal"-small-scale, unlicensed and virtually unregulated-can have severe environmental impacts. Yet pollution control efforts have traditionally focused on large industrial sources, in part because the problem is not wellunderstood. This paper presents a benefit-cost analysis of four practical strategies for reducing emissions from traditional brick kilns in Ciudad Juárez, Mexico. To our knowledge, it is the first such analysis of informal sources. We find very significant net benefits for three of the four control strategies. These results suggest that informal polluters should be a high priority for environmental regulators.

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