Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2004:12: Optimal Mix of Price and Quantity Regulation under Uncertainty

Svante Mandell
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Svante Mandell: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

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

JEL-codes: H23; L51; Q28; Q58

19 pages, September 2004

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