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Environmental Policy à la Carte: Letting Firms Choose their Regulation

  • Frank C. Krysiak

    ()

  • Iris Maria Oberauner

    ()

    (University of Basel)

Environmental policy often has to be devised under informational constraints, like uncertainty and asymmetric information. We consider an environmental policy that aims at reducing the welfare losses caused by asymmetric information while being sufficiently simple for implementation. In this policy, firms can choose between being regulated with an emission tax or a permit market. This serves as a screening device; the firms reveal private information by choosing an instrument. We show that such a menu of policy options improves upon conventional environmental policy. Furthermore, the optimal policy is simple and thus easily implementable. The approach is also theoretically interesting, because the simultaneous use of price- and quantity-based instruments induces an asymmetry into the pricesversus- quantities decision compared to Weitzman’s criterion. Especially, there can be an optimal pooling equilibrium where all firms choose the tax, but it is never optimal that all firms participate in permit trading.

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Paper provided by Faculty of Business and Economics - University of Basel in its series Working papers with number 2008/03.

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Date of creation: 2008
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Handle: RePEc:bsl:wpaper:2008/03
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  1. Moledina, Amyaz A. & Coggins, Jay S. & Polasky, Stephen & Costello, Christopher, 2003. "Dynamic environmental policy with strategic firms: prices versus quantities," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 356-376, March.
  2. Frank Krysiak, 2008. "Ex-post efficient permit markets: a detailed analysis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 39(4), pages 397-410, April.
  3. Krysiak, Frank C., 2008. "Prices vs. quantities: The effects on technology choice," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1275-1287, June.
  4. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
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  8. Kwerel, Evan, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 595-601, October.
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  10. Stiglitz, Joseph E, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 407-30, October.
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  12. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  13. Stephen Smith & Joseph Swierzbinski, 2007. "Assessing the performance of the UK Emissions Trading Scheme," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 37(1), pages 131-158, May.
  14. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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  16. Stiglitz, Joseph E, 1975. "The Theory of "Screening," Education, and the Distribution of Income," American Economic Review, American Economic Association, vol. 65(3), pages 283-300, June.
  17. Karp Larry & Livernois John, 1994. "Using Automatic Tax Changes to Control Pollution Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 38-48, July.
  18. Roberton Williams, 2002. "Prices vs. Quantities vs. Tradable Quantities," NBER Working Papers 9283, National Bureau of Economic Research, Inc.
  19. Richard Newell & William Pizer & Jiangfeng Zhang, 2005. "Managing Permit Markets to Stabilize Prices," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(2), pages 133-157, 06.
  20. Mandell, Svante, 2008. "Optimal mix of emissions taxes and cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 131-140, September.
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  22. Montero, Juan-Pablo, 2000. "Optimal design of a phase-in emissions trading program," Journal of Public Economics, Elsevier, vol. 75(2), pages 273-291, February.
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