Price-Based vs. Quantity-Based Environmental Regulation under Knightian Uncertainty: An Info-Gap Robust Satisficing Perspective
AbstractConventional 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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Bibliographic InfoPaper provided by University of Massachusetts Amherst, Department of Resource Economics in its series Working Papers with number 2006-1.
Length: 20 pages
Date of creation: Jul 2006
Date of revision:
emissions control; environmental regulation; info-gap; Knightian uncertainty; robustness; satisficing;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-AGR-2006-10-14 (Agricultural Economics)
- NEP-ALL-2006-10-14 (All new papers)
- NEP-CBE-2006-10-14 (Cognitive & Behavioural Economics)
- NEP-ENV-2006-10-14 (Environmental Economics)
- NEP-REG-2006-10-14 (Regulation)
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.:
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