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

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  • Karp, Larry

    () (University of California, Berkeley. Dept of agricultural and resource economics and policy)

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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Bibliographic Info

Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 1063.

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Length: 24 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:are:cudare:1063

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Keywords: climate change; uncertainty; pollution; greenhouse effect;

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