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Prices versus Quantities with Morally Concerned Consumers

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  • Schmidt, Klaus
  • Herweg, Fabian

Abstract

It is widely believed that an environmental tax (price regulation) and cap-and-trade (quantity regulation) are equally efficient in controlling pollution when there is no uncertainty. We show that this is not the case if some consumers (firms, local governments) are morally concerned about pollution and the pollution price is inefficiently low for political reasons. Emissions are lower and material welfare is higher with price regulation. Furthermore, quantity regulation gives rise to dysfunctional incentive and distribution effects. It shifts the burden of adjustment to the poor and discourages voluntary efforts to reduce pollution, while price regulation makes these efforts effective.

Suggested Citation

  • Schmidt, Klaus & Herweg, Fabian, 2021. "Prices versus Quantities with Morally Concerned Consumers," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242371, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc21:242371
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    References listed on IDEAS

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    Cited by:

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    2. Moisson, Paul-Henri, 2024. "Social Responsibility, Consequentialism and Public Policy," TSE Working Papers 24-1521, Toulouse School of Economics (TSE).

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    More about this item

    Keywords

    Emissions Trading; Carbon Tax; Climate Change; Prices versusQuantities; Behavioral Industrial Organization;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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