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Prices vs. quantities: Technology choice, uncertainty and welfare

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    Abstract

    This paper shows that tradable emissions permits and an emissions tax affect the firms' technology choice differently under uncertainty. A tax encourages the most flexible technology if and only if stochastic costs and the equilibrium permit price have sufficiently strong positive covariance, compared with the variance in consumer demand for the good produced. Moreover, the firms' technology choices are socially optimal under tradable emissions permits, but not under an emissions tax. Hence, modeling endogenous technology choice provides an argument in favor of tradable emissions permits as compared with emissions taxes.

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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 677.

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    Date of creation: Feb 2012
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    Handle: RePEc:ssb:dispap:677

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    Keywords: Regulation; Technology choice; Welfare; Uncertainty; Investment.;

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