Environmental protection Designing effective regulations for operations that are harmful for the environment is another area in which mechanism design theory can be applied. Companies often have private information about their profitability and the costs of environmental improvement measures.

One general insight is that companies that claim to have high costs for reducing emissions must be induced to maintain a low degree of activity. Otherwise there will be incentives for all companies to make the same claim.

Optimal regulation schemes may involve a host of different instruments, including emission quotas, emission charges, tradable emission rights, and so on.

Auctions These constitute an important area for the application of mechanism design theory. In practice there are several different forms: for instance English auctions in which potential buyers make gradually rising bids orally or Dutch auctions where the seller’s oral bid gradually declines. Other variants involve sealed bids. In one auction form, the highest bidder pays what he or she has bid, in another form the winner pays only the second highest bid. Which form provides the seller with the highest expected return? Which is best for society, when also buyers’ gains are taken into account?