Research Papers in Economics, Department of Economics, Stockholm University
Optimal Mix of Price and Quantity Regulation under Uncertainty
Abstract: This paper takes on the issue of ‘Prices vs. Quantities’,
see Weitzman (1974), applied to environmental regulations under
uncertainty. It is shown that, from an efficiency point of view, it is
generally preferable to divide the economy into two parts, one regulated
through a tax and the other through cap-and-trade, rather than letting it
be subject to either of these regulation mechanisms. This may be so even
when the latter alternatives are cost effective while the former is not.
Particular interest is devoted to determining the optimal size of each
sector. Generally, a steeper marginal abatement cost function relative to
the marginal abatement benefit function implies that a larger part of the
economy should be taxed.
Keywords: regulation; uncertainty; emissions tax; tradable permits; (follow links to similar papers)
JEL-Codes: H23; L51; Q28; Q58; (follow links to similar papers)
19 pages, September 2004
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