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A Whiter Shade of Pale: on the Political Economy of Regulatory Instruments

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Abstract

We consider an intertemporal policy game between changing governments that differ in their attitudes towards a particular feature of market outcomes, exemplified with environmental pollution. When in power, a government will choose policy instruments and set strictness of regulation with a view to influencing the policy of future, possibly different, governments. We demonstrate that a ‘brown’ government favours emission quotas over effluent taxes, as quotas establish property rights that are costly to reverse. Conversely, a ‘green’ government prefers to regulate by taxes, in order to limit the incentives of future ‘brown’ governments to ease regulations. Strategic behaviour tends to exaggerate policy differences (making ‘green’ governments ‘greener’ and ‘brown’ governments ‘browner’) compared to when such strategic considerations were not an issue.

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  • Baldursson, Fridrik M & von der Fehr, Nils-Henrik M, 2004. "A Whiter Shade of Pale: on the Political Economy of Regulatory Instruments," Memorandum 29/2004, Oslo University, Department of Economics.
  • Handle: RePEc:hhs:osloec:2004_029
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    File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2004/Memo-29-2004.pdf
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    References listed on IDEAS

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    1. Fishelson, Gideon, 1976. "Emission control policies under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 3(3), pages 189-197, October.
    2. Torsten Persson & Lars E. O. Svensson, 1989. "Why a Stubborn Conservative would Run a Deficit: Policy with Time-Inconsistent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 325-345.
    3. Alberto Alesina, 1987. "A Positive Theory of Fiscal Deficits and Government Debt in a Democracy," UCLA Economics Working Papers 435, UCLA Department of Economics.
    4. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482 Elsevier.
    5. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    6. Hoel, Michael, 1998. " Emission Taxes versus Other Environmental Policies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(1), pages 79-104, March.
    7. Bruno Biais & Enrico Perotti, 2002. "Machiavellian Privatization," American Economic Review, American Economic Association, vol. 92(1), pages 240-258, March.
    8. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-332, April.
    9. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    10. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
    11. Von Der Fehr, N.H.M. & Kuhn, K.U., 1992. "Coase vs. Pacman: Who Eats Whom in the Durable Goods Monopoly?," UFAE and IAE Working Papers 178.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    12. Adar, Zvi & Griffin, James M., 1976. "Uncertainty and the choice of pollution control instruments," Journal of Environmental Economics and Management, Elsevier, vol. 3(3), pages 178-188, October.
    13. Gary S. Becker, 1983. "A Theory of Competition Among Pressure Groups for Political Influence," The Quarterly Journal of Economics, Oxford University Press, vol. 98(3), pages 371-400.
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    Cited by:

    1. Kiuila, O. & Rutherford, T.F., 2013. "The cost of reducing CO2 emissions: Integrating abatement technologies into economic modeling," Ecological Economics, Elsevier, vol. 87(C), pages 62-71.
    2. Xavier Vives, 2009. "Strategic complementarity in multi-stage games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 40(1), pages 151-171, July.

    More about this item

    Keywords

    regulation; political economy; effluent taxes; tradable quotas; property rights; commitment; environmental management;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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