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Prices vs. Quantities: Robust Regulation

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  • Zi Yang Kang

Abstract

This paper revisits the classic instrument choice problem in a setting with consumption externalities, through the lens of robust mechanism design. A regulator can implement any incentive-compatible policy but is uncertain about how individual demand is correlated with marginal externalities, and evaluates policies by worst-case welfare. The optimal policy is a quantity control: a floor for positive externalities and a ceiling for negative externalities. If the sign of the correlation is known, a uniform tax or subsidy can be optimal. The framework also applies to regulatory uncertainty and costly screening, providing a welfare-based explanation for the prevalence of non-price policies.

Suggested Citation

  • Zi Yang Kang, 2026. "Prices vs. Quantities: Robust Regulation," Papers 2603.15832, arXiv.org.
    • Handle: RePEc:arx:papers:2603.15832
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    File URL: http://arxiv.org/pdf/2603.15832
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