Individual Transferable Quotas in Cournot Competition  Yasunori Okumura August 28, 2014 Abstract We focus on the individual transferable quota system. We consider a product market in which rms engage in Cournot competition, but rms cannot set their quantities exceed the quotas that held and can trade their initial quotas in a perfectly competitive market. First, we show that an ine¢cient outcome may be realized. Moreover, we show that ine¢cient trades can occur; that is, a rm can sell quotas to a less e¢cient rm. We compare three regulatory policy instruments, individual transferable quotas, individual non-transferable quotas and specic taxes. Further, we consider the e/ect of quota share limits on the Cournot equilibrium and show that tightening these limits never increases social welfare and can, rather, decrease it. Keywords: Individual transferable quota; Cournot; Taxation; Reg- ulation JEL classication codes: Q22; L13; Q28; Q58 1 Introduction We consider a model with individual transferable quotas (hereafter ITQs). In the product market, rms engage in Cournot competition but they cannot choose outputs exceeding the quotas held by them. The quotas are initially distributed to rms that can purchase or sell their initially distributed quotas in a competitive market for quotas. In the real world, authorities adopt such systems in order to preserve shery resources. For example, Newell et al. (2005) state that ITQs are adopted to manage over 60 species in more than 15 countries. However, several shery man- agers are concerned that introducing ITQs may increase rms market powers,  An earlier version of this paper is presented at the spring meeting of Japanese Economic Association, 2013. The author is grateful to Yasuhiro Takarada and Noriaki Matsushima for their comments and suggestions. 1