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

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  • Larry Karp

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  • Jiangfeng Zhang

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Abstract

Non-strategic firms with rational expectations make investment and emissions decisions. The investment rule depends on firms’ beliefs about future emissions policies. We compare emissions taxes and quotas when the (strategic) regulator and (nonstrategic) firms have asymmetric information about abatement costs, and all agents use Markov Perfect decision rules. Emissions taxes create a secondary distortion at the investment stage, unless a particular condition holds; emissions quotas do not create a secondary distortion. We solve a linear-quadratic model calibrated to represent the problem of controlling greenhouse gasses. The endogeneity of abatement capital favors taxes, and it increases abatement.
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Suggested Citation

  • 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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    References listed on IDEAS

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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;

    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
    • H - Public Economics

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