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Taxes versus quantities for a stock pollutant with endogenous abatement costs and asymmetric information

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  • Larry Karp
  • Jiangfeng Zhang

Abstract

We compare emissions taxes and quotas when a (strategic) regulator and (non-strategic) firms have asymmetric information about abatement costs, and all agents use Markov Perfect decision rules. Firms make investment decisions that affect their future abatement costs. For general functional forms, firms’ investment policy is information-constrained efficient when the regulator uses a quota, but not when the regulator uses an emissions tax. This advantage of quotas over emissions taxes has not previously been recognized. For a special functional form (linear-quadratic) both policies are constrained efficient. Using numerical methods, we find that a tax has some advantages in this case.
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  • Larry Karp & Jiangfeng Zhang, 2012. "Taxes versus quantities for a stock pollutant with endogenous abatement costs and asymmetric information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(2), pages 371-409, February.
    • Handle: RePEc:spr:joecth:v:49:y:2012:i:2:p:371-409
    DOI: 10.1007/s00199-010-0561-y
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    More about this item

    Keywords

    Pollution control; Investment; Asymmetric information; Rational expectations; Choice of instruments; C61; D8; H21; Q28; C72; H4; Q54;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H4 - Public Economics - - Publicly Provided Goods
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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