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The Role of Stocks and Shocks Concepts in the Debate Over Price Versus Quantity

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  • John Parsons

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  • Luca Taschini

    ()

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    Abstract

    Recent literature showed that the choice between a price or quantity control depends, in part, on the dynamic structure of cost uncertainty. Temporary shocks to abatement cost favors the use of a price control, while permanent shocks favor a quantity control. Unfortunately, the importance of this assumption to the optimal choice has not yet received wide attention among economists. We analyze the regulatory sproblem in an alternative setting and reproduce these results. Our contribution is the simplicity of the model and the accessibility of the results, which reinforce the critical role played by the assumed structure of uncertainty. Copyright The Author(s) 2013

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    File URL: http://hdl.handle.net/10.1007/s10640-012-9614-y
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    Bibliographic Info

    Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

    Volume (Year): 55 (2013)
    Issue (Month): 1 (May)
    Pages: 71-86

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    Handle: RePEc:kap:enreec:v:55:y:2013:i:1:p:71-86

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    Web page: http://www.springerlink.com/link.asp?id=100263

    Related research

    Keywords: Cap and trade; Permanent shocks; Tax; Transitory shocks; H23; Q28; Q50; Q58;

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    1. Hoel, Michael & Karp, Larry, 2001. "Taxes versus Quotas for a Stock Pollutant," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5fx9p7kf, Department of Agricultural & Resource Economics, UC Berkeley.
    2. Heutel, Garth, 2011. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Working Papers 11-8, University of North Carolina at Greensboro, Department of Economics.
    3. Garth Heutel, 2011. "Online Appendix to "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks"," Technical Appendices 10-62, Review of Economic Dynamics.
    4. Larry Karp & Jiangfeng Zhang, 2005. "Regulation of Stock Externalities with Correlated Abatement Costs," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(2), pages 273-300, October.
    5. Hoel, Michael & Karp, Larry, 2000. "Taxes and Quotas for a Stock Pollutant with Multiplicative Uncertainty," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9v86p5s7, Department of Agricultural & Resource Economics, UC Berkeley.
    6. Pizer, William & Newell, Richard, 1998. "Regulating Stock Externalities Under Uncertainty," Discussion Papers dp-99-10-rev, Resources For the Future.
    7. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
    8. Kelly, David L., 2005. "Price and quantity regulation in general equilibrium," Journal of Economic Theory, Elsevier, vol. 125(1), pages 36-60, November.
    9. Fischer, Carolyn & Springborn, Michael R., 2011. "Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes," Discussion Papers dp-09-47-rev, Resources For the Future.
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