Comparison between Individual Transferable Quotas and Specific Taxation in Free Entry

In this paper, we consider a market where entrants can freely enter and exit, and the total output would be socially excessive without any regulation. We compare the effects of two alternative regulatory policies in the market: the individually transferable quota system and the specific tax system. We show that any market outcome under the specific tax system can be achieved under the individually transferable quota system, but the converse is not true.