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Prices vs quantitities: the case of risk averse agents

We explore the efficacy of price and quantity controls as environmental policy instruments in a stochastic setting in which agents are risk averse. We demonstrate that the assumption of risk aversion may improve the performance of a tax relative to that of a system of tradable quotas, and that restricting quota trade may enhance efficiency even though risk aversion in itself limits volumes of trade. The government may be able to improve the performance of a tradable quota system by judicious choice of distribution and amount of initial quotas and by trading pro-actively in the quota market.

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File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2002/Memo-01-2002.pdf
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Paper provided by Oslo University, Department of Economics in its series Memorandum with number 01/2002.

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Length: 25 pages
Date of creation: 21 Feb 2002
Date of revision:
Handle: RePEc:hhs:osloec:2002_001
Contact details of provider: Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
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  1. Stavins, Robert, 2004. "Environmental Economics," Working Paper Series rwp04-051, Harvard University, John F. Kennedy School of Government.
  2. Stavins, Robert N., 2003. "Experience with market-based environmental policy instruments," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 9, pages 355-435 Elsevier.
  3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474, April.
  4. Anastasios Xepapadeas, 2001. "Environmental Policy and Firm Behavior: Abatement Investment and Location Decisions under Uncertainty and Irreversibility," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 281-308 National Bureau of Economic Research, Inc.
  5. Zhao, Jinhua, 2003. "Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges," Journal of Public Economics, Elsevier, vol. 87(12), pages 2765-2789, December.
  6. Chao, Hung-Po & Wilson, Robert, 1993. "Option Value of Emission Allowances," Journal of Regulatory Economics, Springer, vol. 5(3), pages 233-49, September.
  7. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
  8. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers 402, California Institute of Technology, Division of the Humanities and Social Sciences.
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