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

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  • Karp, Larry

Abstract

Disagreement over the form of regulation of greenhouse gasses motivates a comparison of market based and command and control policies. More efficient policies can increase aggregate marginal abatement cost, resulting in higher emissions. Multiple investment equilibria and “regulatory uncertainty†arise when firms anticipate command and control policies. Market based policies eliminate this uncertainty. Command and control policies cause firms to imitate other firms’ investment decisions, leading to similar costs and small potential efficiency gains from trade. Market based policies induce firms to make different investment decisions, leading to different costs and large gains from trade. We imbed the regulatory problem in a “global game†and show that the unique equilibrium to that game is constrained socially optimal.

Suggested Citation

  • Karp, Larry, 2008. "Correct (and misleading) arguments for using market based pollution control policies," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt8rw5801j, Department of Agricultural & Resource Economics, UC Berkeley.
  • Handle: RePEc:cdl:agrebk:qt8rw5801j
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    References listed on IDEAS

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    Cited by:

    1. Narita, Daiju, 2010. "Climate policy as expectation management?," Kiel Working Papers 1624, Kiel Institute for the World Economy (IfW).
    2. Narita, Daiju, 2011. "Climate policy as expectation management?," Kiel Working Papers 1681, Kiel Institute for the World Economy (IfW).

    More about this item

    Keywords

    tradable permits; coordination games; multiple equilibria; global games; regulatory uncertainty; climate change policies; California AB32;

    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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