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Prices versus Quantities Revisited: What Do Policymakers Need to Know to Set Pigouvian Taxes and Subsidies?

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Abstract

What information do policymakers need to design Pigouvian taxes or subsidies? Standard logic suggests that it is sufficient to know the size of the externality and unnecessary to know about quantities. Yet this logic is incorrect if interventions have fixed costs, taxes create deadweight losses, or there are distributional concerns. We present a model in which these considerations can make it more valuable for policymakers to learn about equilibrium quantities. We apply the model to congestion pricing, which has high fixed costs, and to a proposed housing subsidy in Boston that features deadweight losses and distributional concerns.

Suggested Citation

  • Denise DiPasquale & Edward Ludwig Glaeser & Adam M. Guren & Paul S. Willen, 2026. "Prices versus Quantities Revisited: What Do Policymakers Need to Know to Set Pigouvian Taxes and Subsidies?," Working Papers 26-8, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:103475
    DOI: 10.29412/res.wp.2026.08
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    Keywords

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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations

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