IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Prices vs. Quantities with Fiscal Cushioning

Regulating international externalities, like climate change, raises various enforcement problems. It is often argued that international price-based regulations (e.g. emission taxes) are more difficult to enforce than quantity-based regulations (e.g. tradable pollution permits). In this paper, we analyze the relative performance of price-based and quantity-based instruments when costs and benefits are uncertain and enforcement of quantity regimes is stricter than that of price regimes. We show that under these conditions, instrument choice solely based on the relative slopes of the marginal curves can yield inefficient results. If policy enforcement differs, rational policy choice should also take into account the level of the marginal benefit curve, as well as institutional parameters. In contrast to earlier analyses on "Prices vs. Quantities", we find that the choice of instrument also depends on the variance of the marginal abatement costs. Numerical simulations of our stylized model suggest that, for climate policies, quantity-regulations might well be preferable to price-based approaches after all.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.ied.ethz.ch/pub/pdf/IED_WP11_Rohling_Ohndorf.pdf
Download Restriction: no

Paper provided by IED Institute for Environmental Decisions, ETH Zurich in its series IED Working paper with number 10-11.

as
in new window

Length: 33 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:ied:wpsied:10-11
Contact details of provider: Postal:
Weinbergstrasse 35, CH-8092 Zürich

Phone: +41 44 632 41 28
Fax: +41 44 632 12 18
Web page: http://www.ied.ethz.ch
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October.
  2. Svendsen, Gert Tinggaard & Daugbjerg, Carsten & Hjollund, Lene & Pedersen, Anders Branth, 2001. "Consumers, industrialists and the political economy of green taxation: CO2 taxation in OECD," Energy Policy, Elsevier, vol. 29(6), pages 489-497, May.
  3. Renate Schubert & Julia Blasch & Kristin Hoffmann, 2007. "Environmental Protection, Energy Policy and Poverty Reduction – Synergies of an Integrated Approach," IED Working paper 07-01, IED Institute for Environmental Decisions, ETH Zurich.
  4. Carlos Chávez & Mauricio Villena & Johan Stranlund, 2009. "The Choice of Policy Instruments to Control Pollution under Costly Enforcement and Incomplete Information," Working Papers 01-2009, Departamento de Economía, Universidad de Concepción.
  5. Stefanie Engel & Charles Palmer, 2008. "“Painting the Forest REDD?” Prospects for Mitigating Climate Change Through Reducing Emissions from Deforestation and Degradation," IED Working paper 08-03, IED Institute for Environmental Decisions, ETH Zurich.
  6. Michael Hoel & Larry Karp, 1999. "Taxes and Quotas for a Stock Pollutant with Multiplicative Uncertainty," Working Papers 1999.15, Fondazione Eni Enrico Mattei.
  7. Hoel, Michael & Karp, Larry, 2001. "Taxes versus Quotas for a Stock Pollutant," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5fx9p7kf, Department of Agricultural & Resource Economics, UC Berkeley.
  8. Yohe, Gary Wynn, 1977. "Comparisons of price and quantity controls: A survey," Journal of Comparative Economics, Elsevier, vol. 1(3), pages 213-233, September.
  9. Julia Blasch & Renate Schubert & Birgit Soete, 2010. "Grün aus der Krise – Was können «grüne» Konjunkturpakete leisten?," IED Working paper 10-10, IED Institute for Environmental Decisions, ETH Zurich.
  10. Astrid Zabel & Karen Pittel & Göran Bostedt & Stefanie Engel, 2009. "Comparing Conventional and New Policy Approaches for Carnivore Conservation – Theoretical Results and Application to Tiger Conservation," IED Working paper 09-06, IED Institute for Environmental Decisions, ETH Zurich.
  11. Kaplow, Louis & Shavell, Steven, 1994. "Optimal Law Enforcement with Self-Reporting of Behavior," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 583-606, June.
  12. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  13. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  14. Devon Garvie & Andrew Keeler, 1993. "Incomplete Enforcement with Endogenous Regulatory Choice," Working Papers 873, Queen's University, Department of Economics.
  15. 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.
  16. Malik, Arun S, 1992. "Enforcement Costs and the Choice of Policy Instruments for Controlling Pollution," Economic Inquiry, Western Economic Association International, vol. 30(4), pages 714-21, October.
  17. Jon Hovi & Bjart Holtsmark, 2006. "Cap-and-trade or carbon taxes? The feasibility of enforcement and the effects of non-compliance," International Environmental Agreements- Politics, Law and Economics, Springer, vol. 6(2), pages 137-155, June.
  18. Aldy, Joseph E. & Ley, Eduardo & Parry, Ian W.H., 2008. "A Tax-Based Approach to Slowing Global Climate Change," Discussion Papers dp-08-26, Resources For the Future.
  19. Hoel, M., 1990. "Efficient International Agreements For Reducing Emissions Of Co2," Memorandum 06/1990, Oslo University, Department of Economics.
  20. Fishelson, Gideon, 1976. "Emission control policies under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 3(3), pages 189-197, October.
  21. Anger, Niels & Böhringer, Christoph & Lange, Andreas, 2006. "Differentiation of Green Taxes: A Political-Economy Analysis for Germany," ZEW Discussion Papers 06-03, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  22. Inés Macho-Stadler, 2008. "Environmental regulation: choice of instruments under imperfect compliance," Spanish Economic Review, Springer;Spanish Economic Association, vol. 10(1), pages 1-21, March.
  23. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
  24. Ian W. H. Parry, 2003. "Fiscal Interactions and the Case for Carbon Taxes Over Grandfathered Carbon Permits," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 385-399.
  25. Fell, Harrison & MacKenzie, Ian A. & Pizer, William A., 2012. "Prices versus quantities versus bankable quantities," Resource and Energy Economics, Elsevier, vol. 34(4), pages 607-623.
  26. Inés Macho-Stadler & David Pérez-Castrillo, 2004. "Optimal Enforcement Policy and Firm's Emissions and Compliance with Environmental Taxes," Working Papers 124, Barcelona Graduate School of Economics.
  27. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  28. Downing, Paul B. & Watson, William Jr., 1974. "The economics of enforcing air pollution controls," Journal of Environmental Economics and Management, Elsevier, vol. 1(3), pages 219-236, November.
  29. Keeler, Andrew G., 1991. "Noncompliant firms in transferable discharge permit markets: Some extensions," Journal of Environmental Economics and Management, Elsevier, vol. 21(2), pages 180-189, September.
  30. Zhang, ZhongXiang & Baranzini, Andrea, 2004. "What do we know about carbon taxes? An inquiry into their impacts on competitiveness and distribution of income," Energy Policy, Elsevier, vol. 32(4), pages 507-518, March.
  31. Michael Hoel, 1993. "Harmonization of carbon taxes in international climate agreements," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 3(3), pages 221-231, June.
  32. Agnar Sandmo, 2002. "Efficient Environmental Policy with Imperfect Compliance," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 23(1), pages 85-103, September.
  33. JunJie Wu & Bruce A. Babcock, 1996. "Spatial Heterogeneity and the Choice of Instruments to Control Nonpoint Pollution," Center for Agricultural and Rural Development (CARD) Publications 96-wp164, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  34. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
  35. Richard S.J. Tol, 2007. "The Social Cost Of Carbon: Trends, Outliers And Catastrophes," Working Papers FNU-144, Research unit Sustainability and Global Change, Hamburg University, revised Aug 2007.
  36. Stefanie Engel & Charles Palmer, 2009. "The Complexities of Decentralization in a Globalizing World," IED Working paper 09-08, IED Institute for Environmental Decisions, ETH Zurich.
  37. Livernois, John & McKenna, C. J., 1999. "Truth or consequences: Enforcing pollution standards with self-reporting," Journal of Public Economics, Elsevier, vol. 71(3), pages 415-440, March.
  38. Andreas Polk & Armin Schmutzler, 2003. "Lobbying against Environmental Regulation vs. Lobbying for Loopholes," SOI - Working Papers 0301, Socioeconomic Institute - University of Zurich.
  39. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
  40. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
  41. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August.
  42. Finger, Robert & Hediger, Werner, 2007. "The Application of Robust Regression to a Production Function Comparison – the Example of Swiss Corn," MPRA Paper 4740, University Library of Munich, Germany.
  43. Philippe Quirion, 2004. "Prices versus Quantities in a Second-Best Setting," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(3), pages 337-359, November.
  44. Malik, Arun S., 1990. "Markets for pollution control when firms are noncompliant," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 97-106, March.
  45. Harford, Jon D., 1978. "Firm behavior under imperfectly enforceable pollution standards and taxes," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 26-43, March.
  46. Warwick J. McKibbin & Peter J. Wilcoxen, 2002. "The Role of Economics in Climate Change Policy," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 107-129, Spring.
  47. Stavins, Robert, 1997. "Policy Instruments for Climate Change: How Can National Governments Address a Global Problem?," Discussion Papers dp-97-11, Resources For the Future.
  48. Tol, Richard S. J., 2005. "The marginal damage costs of carbon dioxide emissions: an assessment of the uncertainties," Energy Policy, Elsevier, vol. 33(16), pages 2064-2074, November.
  49. Cameron Hepburn, 2006. "Regulation by Prices, Quantities, or Both: A Review of Instrument Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 22(2), pages 226-247, Summer.
  50. Astrid Zabel & Brian Roe, 2009. "Performance Payments for Environmental Services : Lessons from Economic Theory on the Strength of Incentives in the Presence of Performance Risk and Performance Measurement Distortion," IED Working paper 09-07, IED Institute for Environmental Decisions, ETH Zurich.
  51. Gary W. Yohe, 1978. "Towards a General Comparison of Price Controls and Quantity Controls under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 45(2), pages 229-238.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ied:wpsied:10-11. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.