Advanced Search
MyIDEAS: Login to save this paper or follow this series

Prices vs. Quantities with Endogenous Cost Structure

Contents:

Author Info

  • Halvor Briseid Storrøsten
Registered author(s):

    Abstract

    Authorities often lack information for efficient regulation of the commons. This paper derives a criterion comparing prices versus tradable quantities in terms of expected welfare, given uncertainty, optimal policy and endogenous cost structure. I show that one cannot determine which regulatory instrument that induces the highest expected welfare based on the relative curvatures of the cost and benefit functions alone. Furthermore, optimal policy involves different production (or price) targets across the regulatory instruments, and does not equalize marginal costs and expected marginal benefits under prices. The reason is that firms choose a cost structure which induces exaggerate fluctuations in consumption of the public good under prices, and the regulator has to compensate for this when determining optimal policy. Because no such negative externality arises under quantities, the relative performance of prices is deteriorated. A numerical illustration suggests significant impact. Finally, either regulatory instrument may induce the highest technology investment levels.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2014/wp-cesifo-2014-02/cesifo1_wp4625.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4625.

    as in new window
    Length:
    Date of creation: 2014
    Date of revision:
    Handle: RePEc:ces:ceswps:_4625

    Contact details of provider:
    Postal: Poschingerstrasse 5, 81679 Munich
    Phone: +49 (89) 9224-0
    Fax: +49 (89) 985369
    Email:
    Web page: http://www.cesifo.de
    More information through EDIRC

    Related research

    Keywords: regulation; technology choice; uncertainty; investment; welfare;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Jung, Chulho & Krutilla, Kerry & Boyd, Roy, 1996. "Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 95-111, January.
    2. Carbone, Jared C. & Helm, Carsten & Rutherford, Thomas F., 2008. "The Case for International Emission Trade in the Absence of Cooperative Climate Policy," Darmstadt Discussion Papers in Economics, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL) 35491, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
    3. Zhao, Jinhua, 2000. "Irreversible Abatement Investment Under Cost Uncertainties: Tradable Emission Permits And Emissions Charges," 2000 Annual meeting, July 30-August 2, Tampa, FL, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 21816, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Michael Hoel & Larry Karp, 1999. "Taxes and Quotas for a Stock Pollutant with Multiplicative Uncertainty," Working Papers, Fondazione Eni Enrico Mattei 1999.15, Fondazione Eni Enrico Mattei.
    5. Requate, Till & Unold, Wolfram, 2003. "Environmental policy incentives to adopt advanced abatement technology:: Will the true ranking please stand up?," European Economic Review, Elsevier, Elsevier, vol. 47(1), pages 125-146, February.
    6. Löschel, Andreas, 2001. "Technological change in economic models of environmental policy: a survey," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 01-62, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. V. Denicolo, 1997. "Pollution-Reducing Innovations Under Taxes or Permits," Working Papers 281, Dipartimento Scienze Economiche, Universita' di Bologna.
    8. Karp, Larry & Zhang, Jiangfeng, 2006. "Regulation with anticipated learning about environmental damages," Journal of Environmental Economics and Management, Elsevier, vol. 51(3), pages 259-279, May.
    9. Juan-Pablo Montero, 2002. "Market Structure and Environmental Innovation," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 215, Instituto de Economia. Pontificia Universidad Católica de Chile..
    10. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, Elsevier, vol. 54(2-3), pages 175-195, August.
    11. Magat, Wesley A., 1978. "Pollution control and technological advance: A dynamic model of the firm," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 1-25, March.
    12. Krysiak, Frank C., 2008. "Prices vs. quantities: The effects on technology choice," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1275-1287, June.
    13. Adam Jaffe & Richard Newell & Robert Stavins, 2002. "Environmental Policy and Technological Change," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 22(1), pages 41-70, June.
    14. Jaffe Adam B. & Stavins Robert N., 1995. "Dynamic Incentives of Environmental Regulations: The Effects of Alternative Policy Instruments on Technology Diffusion," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S43-S63, November.
    15. David Popp, 2002. "Induced Innovation and Energy Prices," American Economic Review, American Economic Association, American Economic Association, vol. 92(1), pages 160-180, March.
    16. Kaboski, Joseph P., 2005. "Factor price uncertainty, technology choice and investment delay," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 29(3), pages 509-527, March.
    17. Baldursson, Fridrik M. & von der Fehr, Nils-Henrik M., 2008. "Prices vs. quantities: Public finance and the choice of regulatory instruments," European Economic Review, Elsevier, Elsevier, vol. 52(7), pages 1242-1255, October.
    18. Meredith Fowlie, 2010. "Emissions Trading, Electricity Restructuring, and Investment in Pollution Abatement," American Economic Review, American Economic Association, American Economic Association, vol. 100(3), pages 837-69, June.
    19. Kon, Yoshinori, 1983. "Capital Input Choice under Price Uncertainty: A Putty-Clay Technology Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 183-97, February.
    20. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, Elsevier, vol. 85(3), pages 409-434, September.
    21. Mendelsohn, Robert, 1984. "Endogenous technical change and environmental regulation," Journal of Environmental Economics and Management, Elsevier, vol. 11(3), pages 202-207, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_4625. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.