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Prices versus Quantities Reassessed

Author

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  • Larry S. Karp
  • Christian P. Traeger

Abstract

“Prices versus quantities” (Weitzman 1974), a hugely influential paper, is widely cited (and taught) in current debates about the best policy to reduce greenhouse gas emissions. The paper’s criterion for ranking policies suggests that technological uncertainty favors taxes over cap and trade. Weitzman models a flow pollutant, but greenhouse gases are persistent. Stock pollutants require a fundamental change in the ranking criterion. Innovations’ persistence and their gradual diffusion both favor the use of cap and trade. Numerical results show that the case for cap and trade as a means of reducing greenhouse gas emissions is stronger than widely believed.

Suggested Citation

  • Larry S. Karp & Christian P. Traeger, 2018. "Prices versus Quantities Reassessed," CESifo Working Paper Series 7331, CESifo.
  • Handle: RePEc:ces:ceswps:_7331
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp7331.pdf
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    References listed on IDEAS

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    1. Moritz A. Drupp & Mark C. Freeman & Ben Groom & Frikk Nesje, 2018. "Discounting Disentangled," American Economic Journal: Economic Policy, American Economic Association, vol. 10(4), pages 109-134, November.
    2. Hoel, Michael & Karp, Larry, 2001. "Taxes and quotas for a stock pollutant with multiplicative uncertainty," Journal of Public Economics, Elsevier, vol. 82(1), pages 91-114, October.
    3. Wood, Peter John & Jotzo, Frank, 2011. "Price floors for emissions trading," Energy Policy, Elsevier, vol. 39(3), pages 1746-1753, March.
    4. Dietz, Simon & Venmans, Frank, 2019. "Cumulative carbon emissions and economic policy: In search of general principles," Journal of Environmental Economics and Management, Elsevier, vol. 96(C), pages 108-129.
    5. Perino, Grischa & Requate, Till, 2012. "Does more stringent environmental regulation induce or reduce technology adoption? When the rate of technology adoption is inverted U-shaped," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 456-467.
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    Cited by:

    1. Torben K. Mideksa, 2020. "Pricing Pollution," CESifo Working Paper Series 8269, CESifo.
    2. Stiglitz, Joseph E., 2019. "Addressing climate change through price and non-price interventions," European Economic Review, Elsevier, vol. 119(C), pages 594-612.
    3. Li, Jianglong & Huang, Jiashun, 2020. "The expansion of China's solar energy: Challenges and policy options," Renewable and Sustainable Energy Reviews, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    policy instruments; pollution; climate change; taxes; quantities; regulation; uncertainty; cap and trade; technology;
    All these keywords.

    JEL classification:

    • Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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