Prices vs. Quantities with incomplete enforcement and different enforcement probabilities
AbstractRegulating inter-country externalities, like climate change, raises various enforcement problems. It is often argued that international pricebased regulations (e.g. emission taxes) are more difficult to enforce than quantity-based regulations (e.g. tradable pollution permits). In this paper, we analyze the relative performance of price-based and quantity-based instruments for cases where costs and benefits are uncertain and enforcement of quantity regimes is stricter than for price-based regimes. We show that under these conditions, instrument choice solely based on the relative slopes of the marginal costs can be inefficient. If enforcement probabilities differ, rational policy choice should also take into account the level of the marginal benefit curve, as well as institutional parameters. In contrast to earlier analyses on Prices vs. Quantities, we find that the difference in welfare for both policy instruments also depends on the variance of the marginal abatement costs. Furthermore, numerical simulations of our stylized model suggest that, for climate policies, quantity-regulations might well be preferable to price-based approaches after all. --
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Bibliographic InfoPaper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Hannover 2010 with number 24.
Date of creation: 2010
Date of revision:
market-based instruments; incomplete enforcement; environmental regulation; uncertainty;
Find related papers by JEL classification:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
- 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-ALL-2010-09-25 (All new papers)
- NEP-CMP-2010-09-25 (Computational Economics)
- NEP-ENE-2010-09-25 (Energy Economics)
- NEP-ENV-2010-09-25 (Environmental Economics)
- NEP-REG-2010-09-25 (Regulation)
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