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Prices versus Quantities versus Hybrids in the Presence of Co-pollutants

Listed author(s):
  • Stranlund, John K.
  • Son, Insung

We investigate the optimal regulation of a pollutant given its interaction with another controlled pollutant under asymmetric information about firms’ abatement costs. The co-pollutant is regulated, but perhaps not efficiently. Our focus is on optimal instrument choice in this setting, and we derive rules for determining whether a pollutant should be regulated with an emissions tax, tradable permits, or a hybrid price and quantity policy, given the regulation of its co-pollutant. The policy choices depend on the relative slopes of the damage functions for both pollutants and the aggregate marginal abatement cost function, including whether the pollutants are complements or substitutes in abatement and whether the co-pollutant is controlled with a tax or tradable permits.

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File URL: http://purl.umn.edu/205422
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Paper provided by Agricultural and Applied Economics Association & Western Agricultural Economics Association in its series 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California with number 205422.

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Date of creation: 2015
Handle: RePEc:ags:aaea15:205422
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  1. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
  2. Juan-Pablo Montero, 2008. "A Simple Auction Mechanism for the Optimal Allocation of the Commons," American Economic Review, American Economic Association, vol. 98(1), pages 496-518, March.
  3. Timo Kuosmanen & Marita Laukkanen, 2011. "(In)Efficient Environmental Policy with Interacting Pollutants," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 48(4), pages 629-649, April.
  4. Ren, Xiaolin & Fullerton, Don & Braden, John B., 2011. "Optimal taxation of externalities interacting through markets: A theoretical general equilibrium analysis," Resource and Energy Economics, Elsevier, vol. 33(3), pages 496-514, September.
  5. Ambec, Stefan & Coria, Jessica, 2013. "Prices vs quantities with multiple pollutants," Journal of Environmental Economics and Management, Elsevier, vol. 66(1), pages 123-140.
  6. Arthur Caplan, 2006. "A Comparison of Emission Taxes and Permit Markets for Controlling Correlated Externalities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 34(4), pages 471-492, August.
  7. Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2010. "A symmetric safety valve," Energy Policy, Elsevier, vol. 38(9), pages 4921-4932, September.
  8. Caplan, Arthur J. & Silva, Emilson C.D., 2005. "An efficient mechanism to control correlated externalities: redistributive transfers and the coexistence of regional and global pollution permit markets," Journal of Environmental Economics and Management, Elsevier, vol. 49(1), pages 68-82, January.
  9. Woodward, Richard T., 2011. "Double-dipping in environmental markets," Journal of Environmental Economics and Management, Elsevier, vol. 61(2), pages 153-169, March.
  10. Moslener, Ulf & Requate, Till, 2007. "Optimal abatement in dynamic multi-pollutant problems when pollutants can be complements or substitutes," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2293-2316, July.
  11. Harrison Fell & Richard Morgenstern, 2010. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(2), pages 275-297, October.
  12. Muller, Nicholas Z., 2012. "The design of optimal climate policy with air pollution co-benefits," Resource and Energy Economics, Elsevier, vol. 34(4), pages 696-722.
  13. 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.
  14. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  15. James Boyce & Manuel Pastor, 2013. "Clearing the air: incorporating air quality and environmental justice into climate policy," Climatic Change, Springer, vol. 120(4), pages 801-814, October.
  16. Goulder, Lawrence H. & Hafstead, Marc A.C. & Dworsky, Michael, 2010. "Impacts of alternative emissions allowance allocation methods under a federal cap-and-trade program," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 161-181, November.
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