Citizen's participation in permit markets and social welfare under uncertainty.

Summary There are now a number of small or medium-scale experiments where individuals can actively participate in permit markets. Where individuals retain permits, the remaining quota for polluting firms is decreased thereby theoretically increasing global welfare. This result lies on two major hypothesis: first, citizens have rational expectations and, second, they are risk-neutral. In this article, we provide theoretical arguments about the potential welfare-decreasing impact of citizen's participation when at least one of these assumptions is violated. Importantly, our conclusions lead, in some particular cases, to recommend a limited participation of individuals in permit schemes while encouraging a better diffusion of information toward this class of potential participants. This is the case, for instance, when scientific uncertainty about a phenomenon is strong and citizens cannot estimate the marginal abatement cost with confidence.