In terms of economic efficiency in the market for pollution, it does not matter if the
government distributes the permits or auctions them off, as long as firms can sell the
permits to each other. The only difference would be that the government could make
money if it auctioned the permits off, thus allowing it to reduce taxes, which would help
reduce the deadweight loss from taxation. There could also be some deadweight loss
occurring if firms use resources to lobby for additional permits.