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Emission Tax or Standard: The Roles of Productivity Dispersion and Abatement

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  • Shouyong Shi

    (University of Toronto)

  • Zhe Li

    (Shanghai University of Finance and Economics)

Abstract

We compare the welfare effects of different emission-reduction policies in a general equilibrium model with heterogeneous plants. We found that an emission standard could outperform an emission tax or a tradable permit. We characterize the equilibrium conditions for this result to hold. We understand that an emission tax (or Pigouvian tax, Pigou 1954) can maximize social welfare under two conditions: (1) complete information and (2) we consider only the pollution market. The welfare effects of different policies with incomplete information are thoroughly analyzed in the literature (Weitzman 1974, among others). This literature uses a partial-equilibrium analysis. We analyze the welfare effects of different policies when the plants’ responses to policies affect the efficiency of two markets simultaneously: the goods market and the pollution market. A tax policy changes the market behavior of plants in the goods market when the purpose is only to interfere with the pollution market, increasing the gap between the plant-preferred level of output and the society-preferred level of output in the goods market if plants have some market power in the goods market. A standard-policy directly reduces the emissions and causes less goods-market distortion. We show that when some advanced abatement technology is available, the standard policy could achieve higher welfare than the tax policy.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 587.

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Date of creation: 2010
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Handle: RePEc:red:sed010:587

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  1. Juan-Pablo Montero, 2004. "Pollution markets with imperfectly observed emissions," Working Papers 0414, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  2. Kelly, David L., 2005. "Price and quantity regulation in general equilibrium," Journal of Economic Theory, Elsevier, vol. 125(1), pages 36-60, November.
  3. Cameron Hepburn, 2006. "Regulation by Prices, Quantities, or Both: A Review of Instrument Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 22(2), pages 226-247, Summer.
  4. Mandell, Svante, 2008. "Optimal mix of emissions taxes and cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 131-140, September.
  5. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  6. Yohe, Gary W, 1978. "Towards a General Comparison of Price Controls and Quantity Controls under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 45(2), pages 229-38, June.
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