be very valuable when the resource is managed efficiently, the owners of these rights may acquire a substantial amount of wealth. Although the ability to reclaim the previously dissipated wealth for motivating sustainable behavior is an important strength of the system, the ethical issues raised by its distribution among competing claimants are a significant and continuing source of controversy (McCay, 1999).

Another source of controversy involves a broad class of externalities. In general, externalities are effects on the ecosystem or on other parties that are not reflected adequately in the decisions by those holding the access rights. This incomplete internalization of externalities could involve diverse concerns such as adverse effects on species of fish other than those regulated by tradable permits, on the spatial concentration of emissions, or on the consequences of particular upstream water uses on downstream users.

A final source of controversy is ideological. It suggests that because capitalist property rights are the major source of the problem, it is inconceivable that these same rights could be part of the solution.3

OVERVIEW

In this essay I review the experience with three main applications of tradable permit systems: air pollution control, water supply, and fisheries management.4

The next section provides a brief summary of the theory behind these programs and both the economic and environmental consequences anticipated by this theory. Some brief points of comparison are made with other competing and/ or complementary formal public policy strategies such as environmental taxes and legal regulation.

The essay proceeds with a description of the common elements these programs share and the design questions posed by the approach. These include the setting of the limit on access, the initial allocation of rights, transferability rules (both among participants and across time) as well as procedures for monitoring and enforcement. It continues by examining how these design questions have been answered by the air pollution, fishery, and water supply applications and how the answers have evolved over time. This evolution has been influenced by changing technology, increased familiarity with the system, and a desire to respond to some of the controversies surrounding the use of these approaches.

The penultimate section examines the hard evidence on the economic and environmental consequences of adopting these approaches. This evidence is juxtaposed with the expectations created by both the economic theory of tradable permits and the theory of choice between co-management and tradable permits by Rose (this volume:Chapter 7).

The final section brings together some tentative lessons that can be drawn from this experience.



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