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Prices vs. Quantities vs. Tradable Quantities

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  • Roberton Williams

Abstract

This paper extends Weitzman's (1974) seminal paper comparing price and quantity instruments for regulation to consider a third option: tradable quantity regulations, such as tradable permits. Contrary to what prior work has suggested, fixed quantities may be more efficient than tradable quantities if the regulated goods are not perfect substitutes, even when trading ratios are based on the ratio of expected marginal benefits between goods, not simply one-for-one. Indeed, when benefits are independent across goods, or when the goods are complements, tradable quantities are never the most efficient instrument. This theory is applied to dynamic pollution problems, and suggests that permit banking should be allowed for stock pollutants, but not for flow pollutants. These results indicate that many regulations, including the current sulfur dioxide trading program and proposed greenhouse gas regulations, are inefficient.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9283.

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Date of creation: Oct 2002
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Handle: RePEc:nbr:nberwo:9283

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  8. Louis Kaplow & Steven Shavell, 2002. "On the Superiority of Corrective Taxes to Quantity Regulation," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 1-17, January.
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Cited by:
  1. Fell, Harrison & MacKenzie, Ian A. & Pizer, William A., 2012. "Prices versus quantities versus bankable quantities," Resource and Energy Economics, Elsevier, vol. 34(4), pages 607-623.
  2. Anthony Heyes & Sandeep Kapur, 2011. "Regulating altruistic agents," Canadian Journal of Economics, Canadian Economics Association, vol. 44(1), pages 227-246, February.
  3. Frank C. Krysiak & Iris Maria Oberauner, 2008. "Environmental Policy à la Carte: Letting Firms Choose their Regulation," Working papers 2008/03, Faculty of Business and Economics - University of Basel.
  4. Lawrence H. Goulder & William A. Pizer, 2006. "The Economics of Climate Change," NBER Working Papers 11923, National Bureau of Economic Research, Inc.
  5. Pizer, William & Newell, Richard & Zhang, Jiangfeng, 2003. "Managing Permit Markets to Stabilize Prices," Discussion Papers dp-03-34, Resources For the Future.
  6. Montero, J-P., 2004. "Pollution Markets with Imperfectly Observed Emissions," Cambridge Working Papers in Economics 0456, Faculty of Economics, University of Cambridge.
  7. Oikonomou, Vlasis & Jepma, Catrinus & Becchis, Franco & Russolillo, Daniele, 2008. "White Certificates for energy efficiency improvement with energy taxes: A theoretical economic model," Energy Economics, Elsevier, vol. 30(6), pages 3044-3062, November.
  8. Webster, Mort & Sue Wing, Ian & Jakobovits, Lisa, 2010. "Second-best instruments for near-term climate policy: Intensity targets vs. the safety valve," Journal of Environmental Economics and Management, Elsevier, vol. 59(3), pages 250-259, May.
  9. Iris Maria Oberauner, 2010. "Prices vs. Quantities: An Empirical Study of Firms' Instrument Choice," Working papers 2010/07, Faculty of Business and Economics - University of Basel.
  10. Jack Pezzey & Frank Jotzo, 2010. "Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design," Environmental Economics Research Hub Research Reports 1068, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  11. Stephen Holland & Andrew J. Yates, 2014. "Optimal Trading Ratios for Pollution Permit Markets," NBER Working Papers 19780, National Bureau of Economic Research, Inc.

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