Efficient auctions

It seems then, if efficiency is the goal, we have an answer as to what kind of auction to run VCG. In the sections that follow we discuss some of the issues that arise in implementing the VCG auction. The reader interested in revenue maximization will still benefit for two reasons. First, these issues are not unique to the VCG. Second, for reasons not formally modeled, one may be forced to use an efficient auction rather than a revenue maximizing one. These have to do with resale and long term participation by bidders and are discussed in Ausubel and Cramton [3] as well as Milgrom [51]. 

Partha Dasgupta and Eric Maskin. Efficient auctions. The Quarterly Journal of Economics, CXV 341-388,2000. 

The criterion is relevant in a short-run perspective and the criterion may be quite useful for measuring the efficiency of potential auction principles as well as capacity allocation and booking rules in general. 

A maximum 10% of auctioning would make around 210 Mt C02/year available through auctions, out of a total allocated of 2100 Mt C02. The overall shortfall - to be met through emissions abatement (e.g. fuel switching end-use efficiency in the power sector) and international purchase - would then still be only around 100 Mt C02/year, close to the revealed surplus in 2005 and much smaller than the lowest estimates of the total supply of Kyoto project credits. 

The allocation procedures applied by NAPs combine various aspects discussed in this section. Table 2 illustrates and summarizes the transition from an efficient allocation based on auction (or one-off grandfathering) to the various dimensions of distortions that are created by the iterative grandfathering approach using a moving baseline in current NAPs. 

The economically efficient allocation methods are auctions or a one-off free allocation of allowances. The first set of impacts will result if allowances are only allocated in the future, if the power stations are operational today. The value of future allocations delays closure of plants beyond their socially efficient lifespan. This effect is reinforced if the amount of allocation increases with the C02 intensity of the technology. With such technology-specific allocation, more C02-intensive technologies receive additional encouragement to stay operational, further delaying the shift towards less C02-intensive power stations. 

In terms of their incentive effects, one-off grandfathering and auctioning are equivalent and efficient. Thus, both represent the zero-distortions reference case here. 

Of course, efficiency considerations are merely the beginning, and we now examine five other considerations relevant to auctions, namely the distribution of the economic rents created by C02 limits in the economy competitiveness effects of auctioning compared to grandfathering legal considerations dynamic incentives and transaction costs. 

Static efficiency Distribution of rents Competitiveness Legal considerations Dynamic incentives Transaction costs Auctions Auctions in theory, free allocation in practice Depends upon use of auction revenues Auctions Auctions Uncertain, favours auctions in medium term... 

In summary, as long as entry by bidders is not artificially restricted, EU ETS auctions are likely to be very competitive and efficient. There are several possible auction formats, but the most likely candidates are the sealed-bid uniform-price and discriminatory auctions, used in sales of government securities. The limited evidence that we have slightly favours uniform pricing, especially as bidders appear to find uniform-price auctions more straightforward. If participation is a concern, then non-competitive bids may be used. 

The most important objectives of auction design are to promote competition and to encourage entry. Consequently auctions for EU ETS allowances should ensure the widest possible participation by bidders from all sectors. Artificially restricting participation to national buyers or specific sectors is likely to impair revenues and the efficient allocation of allowances. 

One can only speculate whether these additional considerations will increase the political support for greater use of auctioning in phase II. Certainly, as targets become more demanding, efficiency becomes more and more important and the appeal of auctioning will correspondingly increase. The creative deployment of auctions to increase efficiency, stabilize prices, and help to address competitiveness issues would be feasible, and could yield substantial social benefits. 

SO2 permits by comparing the price of permits auctioned by EPA between 1993 and 1997 with private market indices. Joskow et al. (1998) find that by the end of 1994 these prices were virtually identical and thereby conclude that the private market for tradable permits was relatively efficient. Schmalensee et al. (1998) also conclude that the private market for tradable permits was relatively efficient by noting the growth in the level of the trading volume in the market 1.6 million, 4.9 million, and 5.1 million allowances were traded in 1995, 1996, and 1997, respectively. 

Although much of the discussion about allowance distribution focuses on the equity implications of different approaches, Goulder et al. (1999) and Dinan and Rogers (2002) found that recycling revenues from auctioned allowances could also have economy-wide efficiency benefits if they are used to reduce certain types of taxes. 

Left to themselves, markets will expand and erode monopoly positions, but it can take time. This is especially true in electricity and gas where transportation costs can be high and innovation is slow. Public policies can speed up the process by decreasing barriers to trade and to entry. This is the reason why the EU internal energy market was created in 1996. Note that the opening of electricity and gas to competition also requires the creation of a complex series of related markets that must be designed. They bear esoteric names such as day-ahead markets, balancing markets, capacity payments markets, as well as institutions such as explicit auctions, and market coupling. Whenever they are badly conceived or implemented, trade is less efficient and usable cross-border interconnection capacity reduced. Competition is hindered and thus security of supply is reduced. 

Auctions may also be classified according to the different institutional rules governing the exchange. These rules are important because they can affect bidding incentives and thus the type of items offered and the efficiency of an exchange. There are four primary types of auctions ... 

The basic objective of a multi-robot task allocation problem is to have tractable planning that produces efficient and practicable solutions. Auction-based, or market-based, approaches manage this by assembling team information at a single location to make decisions about assigning tasks over the team to produce practicable solutions quickly and concisely [8]. 

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