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Correct (and misleading) argument for using market-based pollution control policies

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  • Karp, Larry S.

Abstract

One argument in favor of market based pollution control policies is sometimes exaggerated, and a different argument is usually ignored. Regardless of whether investment is fixed or endogenous, market based policies might lead to a higher or lower equilibrium abatement compared to the level under command and control policies. Therefore, economists should be cautious about trying to convince anti-market environmentalists of the benefit of market based policies on the grounds that these promote environmental goals. However, market based policies reduce regulatory uncertainty. Under command and control emissions policies, there are multiple rational expectations competitive equilibria at the investment stage. From the standpoint of individual firms, this multiplicity looks like regulatory uncertainty. Market based policies eliminate this uncertainty. These results hold in an environment with common knowledge about market fundamentals. In a global games setting the unique investment equilibrium under command and control emissions policies is constrained efficient.

Suggested Citation

  • Karp, Larry S., 2008. "Correct (and misleading) argument for using market-based pollution control policies," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6030, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea08:6030
    DOI: 10.22004/ag.econ.6030
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    Cited by:

    1. Karp, Larry S. & Stevenson, Megan, 2012. "Green industrial policy: trade and theory," CUDARE Working Papers 123637, University of California, Berkeley, Department of Agricultural and Resource Economics.
    2. Larry Karp & Jiangfeng Zhang, 2016. "Taxes Versus Quantities for a Stock Pollutant with Endogenous Abatement Costs and Asymmetric Information," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 493-533, Springer.
    3. Larry Karp & Jinhua Zhao, 2010. "International Environmental Agreements: Emissions Trade, Safety Valves and Escape Clauses," Revue économique, Presses de Sciences-Po, vol. 61(1), pages 153-182.
    4. Narita, Daiju, 2011. "Climate policy as expectation management?," Kiel Working Papers 1681, Kiel Institute for the World Economy (IfW Kiel).
    5. Narita, Daiju, 2010. "Climate policy as expectation management?," Kiel Working Papers 1624, Kiel Institute for the World Economy (IfW Kiel).

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    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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