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Prices vs quantitities: the case of risk averse agents

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Abstract

We explore the efficacy of price and quantity controls as environmental policy instruments in a stochastic setting in which agents are risk averse. We demonstrate that the assumption of risk aversion may improve the performance of a tax relative to that of a system of tradable quotas, and that restricting quota trade may enhance efficiency even though risk aversion in itself limits volumes of trade. The government may be able to improve the performance of a tradable quota system by judicious choice of distribution and amount of initial quotas and by trading pro-actively in the quota market.

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  • Baldursson, Fridrik M. & von der Fehr, Nils-Henrik M, 2002. "Prices vs quantitities: the case of risk averse agents," Memorandum 01/2002, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2002_001
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    File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2002/Memo-01-2002.pdf
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    References listed on IDEAS

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    1. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
    2. Stavins, Robert N., 2004. "Environmental Economics," Discussion Papers 10841, Resources for the Future.
    3. Stavins, Robert N., 2003. "Experience with market-based environmental policy instruments," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 9, pages 355-435, Elsevier.
    4. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    5. Zhao, Jinhua, 2003. "Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges," Journal of Public Economics, Elsevier, vol. 87(12), pages 2765-2789, December.
    6. Robert W. Hahn, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 753-765.
    7. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
    8. Chao, Hung-Po & Wilson, Robert, 1993. "Option Value of Emission Allowances," Journal of Regulatory Economics, Springer, vol. 5(3), pages 233-249, September.
    9. Anastasios Xepapadeas, 2001. "Environmental Policy and Firm Behavior: Abatement Investment and Location Decisions under Uncertainty and Irreversibility," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 281-308, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    regulation; effluent taxes; tradable quotas; uncertainty; risk aversion; environmental management;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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