Altruistic Arbitrage and Climate Change Mitigation : Rethinking the Role of Cap and Trade Policies

Abstract

We examine the implications for efficient public goods provision, stemming from the relationship between altruism and the endowment effect, focusing our analysis on the problem of climate change mitigation. We argue that the reduction in distortionary valuation (i.e., willingness-to-accept departing from willingness-to-pay) experienced by altruistic market participants implies an ability to mediate ignored trades and extract the gains from trade - an activity we call "altruistic arbitrage" - thereby improving the efficiency of markets. This activity, broadly speaking, restores the Coase Theorem in the context of WTA-WTP disparities. Moreover, it leads to previously unidentified benefits to when markets are employed to protect and foster public goods. On the basis of our findings, we recommend that market maker licenses be auctioned as a novel means to implement cap and trade markets for reducing the long-term effects of climate change.

Keywords: endowment effect, Coase Theorem, altruism, cap and trade, climate change

JEL Classification: K10, K19, K20, D91