Seminal work by Weitzman [Prices vs. quantities, Rev. Econ. Stud. 41 (1974) 477-491] revealed prices are preferred to quantities when marginal benefits are relatively flat compared to marginal costs. We extend this comparison to indexed policies, where quantities are proportional to an index, such as output. We find that policy preferences hinge on additional parameters describing the first and second moments of the index and the ex post optimal quantity level. When the ratio of these variables' coefficients of variation divided by their correlation is less than approximately two, indexed quantities are preferred to fixed quantities. A slightly more complex condition determines when indexed quantities are preferred to prices. Applied to climate change policy, we find that the range of variation and correlation in country-level carbon dioxide emissions and GDP suggests the ranking of an emissions intensity cap (indexed to GDP) compared to a fixed emission cap is not uniform across countries; neither policy clearly dominates the other.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Neuhoff, K. & von Hirschhausen, C., 2005. "Long-term vs. Short-term Contracts; A European perspective on natural gas," Cambridge Working Papers in Economics 0539, Faculty of Economics, University of Cambridge.
- Suzi Kerr & Richard G. Newell, 2003.
"Policy-Induced Technology Adoption: Evidence from the U.S. Lead Phasedown,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 51(3), pages 317-343, 09.
- Kerr, Suzi & Newell, Richard, 2001. "Policy-Induced Technology Adoption: Evidence from the U.S. Lead Phasedown," Discussion Papers dp-01-14, Resources For the Future.
- 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.
- Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-91, September.
- Newell, Richard G. & Pizer, William A., 2003.
"Regulating stock externalities under uncertainty,"
Journal of Environmental Economics and Management,
Elsevier, vol. 45(2, Supple), pages 416-432, March.
- Carolyn Fischer, 2003. "Combining rate-based and cap-and-trade emissions policies," Climate Policy, Taylor & Francis Journals, vol. 3(sup2), pages S89-S103, December.
- Frank Jotzo & John C. V. Pezzey, 2007.
"Optimal Intensity Targets for Greenhouse Gas Emissions Trading Under Uncertainty,"
Economics and Environment Network Working Papers
0701, Australian National University, Economics and Environment Network.
- Frank Jotzo & John Pezzey, 2007. "Optimal intensity targets for greenhouse gas emissions trading under uncertainty," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(2), pages 259-284, October.
- Quirion, Philippe, 2005. "Does uncertainty justify intensity emission caps?," Resource and Energy Economics, Elsevier, vol. 27(4), pages 343-353, November.
- M. L. Weitzman, 1973.
"Prices vs. Quantities,"
106, Massachusetts Institute of Technology (MIT), Department of Economics.
- Richard G. Newell & William A. Pizer, 2008.
NBER Working Papers
13991, National Bureau of Economic Research, Inc.
- A. Denny Ellerman & Ian Sue Wing, 2003. "Absolute versus intensity-based emission caps," Climate Policy, Taylor & Francis Journals, vol. 3(sup2), pages S7-S20, December.
- Frank Jotzo & John C. V. Pezzey, 2006. "Optimal Intensity Targets for Greenhouse Emissions Trading Under Uncertainty," Economics and Environment Network Working Papers 0605, Australian National University, Economics and Environment Network.
- Knut K. Aase, 2004. "A Pricing Model for Quantity Contracts," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 617-642.
- Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
- Philippe Quirion, 2005. "Does uncertainty justify intensity emission caps?," Post-Print halshs-00007162, HAL.
- Helfand, Gloria E, 1991. "Standards versus Standards: The Effects of Different Pollution Restrictions," American Economic Review, American Economic Association, vol. 81(3), pages 622-34, June.
- Lars E. O. Svensson, 2003.
"What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules,"
NBER Working Papers
9421, National Bureau of Economic Research, Inc.
- Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
- Lars E.O. Svensson, 2002. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Working Papers 118, Princeton University, Department of Economics, Center for Economic Policy Studies..
- Pizer, William & Newell, Richard & Zhang, Jiangfeng, 2003.
"Managing Permit Markets to Stabilize Prices,"
dp-03-34, Resources For the Future.
- Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
- 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.
- Robert N. Stavins, 1998. "What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 69-88, Summer.
- Stavins, Robert N., 2005. "Lessons Learned from SO2 Allowance Trading," Choices, Agricultural and Applied Economics Association, vol. 20(1).
- Fischer, Carolyn, 2003. "Combining Rate-Based and Cap-and-Trade Emissions Policies," Discussion Papers dp-03-32, Resources For the Future.
- Chung-Lun Li & Panos Kouvelis, 1999. "Flexible and Risk-Sharing Supply Contracts Under Price Uncertainty," Management Science, INFORMS, vol. 45(10), pages 1378-1398, October.
- Pizer, William, 2005. "The Case for Intensity Targets," Discussion Papers dp-05-02, Resources For the Future.
When requesting a correction, please mention this item's handle: RePEc:eee:jeeman:v:56:y:2008:i:3:p:221-233. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.