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Environmental policy à la carte: Letting firms choose their regulation

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  • Krysiak, Frank C.
  • Oberauner, Iris Maria

Abstract

Under uncertainty, the optimal choice between price and quantity instruments depends on the technology of the regulated firms, which is often private information. We consider an environmental policy that delegates the prices-versus-quantities decision to the firms by offering them the choice between an emissions tax and permit trading. Such an approach is currently used in Swiss climate policy. We provide a detailed characterization of the optimal policy and show that this approach reduces expected social costs compared to a pure tax or permit-trading regime. We demonstrate that an optimal allocation of firms to instruments can be achieved despite substantial informational constraints, and that all firms gain from the introduction of the instrument choice compared to optimally designed single-instrument policies. Furthermore, we discuss the conditions under which this approach is likely to be preferable to a hybrid regulation.

Suggested Citation

  • Krysiak, Frank C. & Oberauner, Iris Maria, 2010. "Environmental policy à la carte: Letting firms choose their regulation," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 221-232, November.
  • Handle: RePEc:eee:jeeman:v:60:y:2010:i:3:p:221-232
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    Cited by:

    1. Shinkuma, Takayoshi & Sugeta, Hajime, 2016. "Tax versus emissions trading scheme in the long run," Journal of Environmental Economics and Management, Elsevier, vol. 75(C), pages 12-24.
    2. Wood, Peter J. & Heindl, Peter & Jotzo, Frank & Löschel, Andreas, 2013. "Linking price and quantity pollution controls under uncertainty," ZEW Discussion Papers 13-025, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. D’Amato, Alessio & Dijkstra, Bouwe R., 2015. "Technology choice and environmental regulation under asymmetric information," Resource and Energy Economics, Elsevier, vol. 41(C), pages 224-247.
    4. Sun, Tianshu & Lu, Susan Feng & Jin, Ginger Zhe, 2016. "Solving shortage in a priceless market: Insights from blood donation," Journal of Health Economics, Elsevier, vol. 48(C), pages 149-165.
    5. Brigitte C. Madrian, 2014. "Applying Insights from Behavioral Economics to Policy Design," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 663-688, August.
    6. repec:eee:jeeman:v:83:y:2017:i:c:p:1-7 is not listed on IDEAS
    7. Hammermann, Andrea & Mohnen, Alwine, 2014. "The pric(z)e of hard work," Journal of Economic Psychology, Elsevier, vol. 43(C), pages 1-15.
    8. Slonim, Robert & Wang, Carmen, 2016. "Market Design for Altruistic Supply: Evidence from the Lab," IZA Discussion Papers 9650, Institute for the Study of Labor (IZA).
    9. Andrea Baranzini, Stefano Carattini, Martin Peclat, 2017. "What drives social contagion in the adoption of solar photovoltaic technology," GRI Working Papers 270, Grantham Research Institute on Climate Change and the Environment.
    10. Bruhin, Adrian & Götte, Lorenz & Haenni, Simon & Jiang, Lingqing, 2014. "Spillovers of Prosocial Motivation: Evidence from an Intervention Study on Blood Donors," IZA Discussion Papers 8738, Institute for the Study of Labor (IZA).
    11. Ashraf, Nava & Bandiera, Oriana & Jack, B. Kelsey, 2014. "No margin, no mission? A field experiment on incentives for public service delivery," Journal of Public Economics, Elsevier, vol. 120(C), pages 1-17.
    12. Lacetera, Nicola & Macis, Mario, 2010. "Do all material incentives for pro-social activities backfire? The response to cash and non-cash incentives for blood donations," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 738-748, August.
    13. Oberauner, Iris Maria, 2010. "Prices vs. Quantities: An Empirical Study of Firms' Instrument Choice," Working papers 2010/07, Faculty of Business and Economics - University of Basel.
    14. Bilgel, Fırat & Galle, Brian, 2015. "Financial incentives for kidney donation: A comparative case study using synthetic controls," Journal of Health Economics, Elsevier, vol. 43(C), pages 103-117.
    15. Sanjit Dhami, 2017. "Human Ethics and Virtues: Rethinking the Homo-Economicus Model," CESifo Working Paper Series 6836, CESifo Group Munich.
    16. Miyamoto, Takuro, 2014. "Taxes versus quotas in lobbying by a polluting industry with private information on abatement costs," Resource and Energy Economics, Elsevier, vol. 38(C), pages 141-167.
    17. Halvor Storrøsten, 2014. "Prices Versus Quantities: Technology Choice, Uncertainty and Welfare," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 59(2), pages 275-293, October.
    18. Halvor Briseid Storrøsten, 2012. "Prices vs. quantities: Technology choice, uncertainty and welfare," Discussion Papers 677, Statistics Norway, Research Department.
    19. Catalina Tejada & Eliana Ferrara & Henrik Kleven & Florian Blum & Oriana Bandiera & Michel Azulai, 2015. "State Effectiveness, Growth, and Development," Working Papers id:6668, eSocialSciences.

    More about this item

    Keywords

    Environmental policy Asymmetric information Screening Uncertainty Prices-versus-quantities;

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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