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Price-Based vs. Quantity-Based Environmental Regulation under Knightian Uncertainty: An Info-Gap Robust Satisficing Perspective

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Author Info

  • John K. Stranlund

    ()
    (Department of Resource Economics, University of Massachusetts Amherst)

  • Yakov Ben-Haim

    ()
    (Mechanical Engineering Technion, Israel Institute of Technology)

Abstract

Conventional wisdom among environmental economists is that the relative slopes of the marginal social benefit and marginal social cost functions determine whether a price-based or quantity-based environmental regulation leads to higher expected social welfare. We revisit the choice between price-based vs. quantity-based environmental regulation under Knightian uncertainty; that is, when uncertainty cannot be modeled with known probability distributions. Under these circumstances, the policy objective cannot be to maximize the expected net benefits of emissions control. Instead, we evaluate an emissions tax and an aggregate abatement standard in terms of maximizing the range of uncertainty under which the welfare loss from error in the estimates of the marginal benefits and costs of emissions control can be limited. The main result of our work is that the same criterion involving the relative slopes of the marginal benefit and cost functions determines whether price-based or quantity-based control is more robust to unstructured uncertainty. Hence, not only does the relative slopes criterion lead to the policy that maximizes the expected net benefits of control under structured uncertainty, it also leads to the policy that maximizes robustness to unstructured uncertainty.

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File URL: http://courses.umass.edu/resec/workingpapers/documents/resecworkingpaper2006-1.pdf
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Bibliographic Info

Paper provided by University of Massachusetts Amherst, Department of Resource Economics in its series Working Papers with number 2006-1.

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Length: 20 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:dre:wpaper:2006-1

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Web page: http://www.umass.edu/resec/
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Related research

Keywords: emissions control; environmental regulation; info-gap; Knightian uncertainty; robustness; satisficing;

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  1. Laffont, Jean Jacques, 1977. "More on Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 177-82, February.
  2. 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.
  3. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
  5. L. Joe Moffitt & John K. Stranlund & Barry C. Field, 2005. "Inspections To Avert Terrorism: Robustness Under Severe Uncertainty," Working Papers 2005-3, University of Massachusetts Amherst, Department of Resource Economics.
  6. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
  7. Philippe Quirion, 2004. "Prices versus Quantities in a Second-Best Setting," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(3), pages 337-360, November.
  8. Malcomson, James M, 1978. "Prices vs. Quantities: A Critical Note on the Use of Approximations," Review of Economic Studies, Wiley Blackwell, vol. 45(1), pages 203-07, February.
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Cited by:
  1. Clara Villegas-Palacio & Jessica Coria, 2010. "On the interaction between imperfect compliance and technology adoption: taxes versus tradable emissions permits," Journal of Regulatory Economics, Springer, vol. 38(3), pages 274-291, December.

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