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Correct (and misleading) argument for using market-based pollution control policies

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  • Karp, Larry S.

Abstract

One argument in favor of market based pollution control policies is sometimes exaggerated, and a different argument is usually ignored. Regardless of whether investment is fixed or endogenous, market based policies might lead to a higher or lower equilibrium abatement compared to the level under command and control policies. Therefore, economists should be cautious about trying to convince anti-market environmentalists of the benefit of market based policies on the grounds that these promote environmental goals. However, market based policies reduce regulatory uncertainty. Under command and control emissions policies, there are multiple rational expectations competitive equilibria at the investment stage. From the standpoint of individual firms, this multiplicity looks like regulatory uncertainty. Market based policies eliminate this uncertainty. These results hold in an environment with common knowledge about market fundamentals. In a global games setting the unique investment equilibrium under command and control emissions policies is constrained efficient.

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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida with number 6030.

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Date of creation: 2008
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Handle: RePEc:ags:aaea08:6030

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Keywords: tradable permits; coordination games; multiple equilibria; global games; regulatory uncertainty; climate change policies; California AB32; Environmental Economics and Policy; C79; L51; Q58;

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