"This is actually an old economic idea, and it's actually been used in some environmental applications," explains Dr. Walden, a professor of agricultural and resource economics. "Let's say that we want to limit the total amount of release of carbon dioxide to the atmosphere. We want to put a cap on the total amount of emissions.

"Rather than telling every company and, indeed, perhaps every household how much carbon dioxide they can emit, what the government would do would sell permits, where the sum of the permits equals the limit on the total emissions," he says. "And companies, therefore, for whom polluting is very valuable and very expensive to reduce, they would likely buy the permits. Other companies, for example, who could perhaps reduce emissions would not.

"And we'd also allow the permits to be traded. So we are setting up a quasi-market system here where the government doesn't get into micromanaging who is allowed to pollute but the government puts an overall limit on the total amount of pollution," he says.