Regulation with Budget Constraints Can Dominate Regulation by Price and by Quantity
A government can use several mechanisms to induce firms to reduce pollution. Well studied are regulations by price and by quantity. We consider a third form of regulation -- government allocates a budget to an agency which subsidizes abatement. We demonstrate that uncertainty can make such constrained regulation more efficient than either regulation by quantity or regulation by price. We also show that the optimal budget declines with a mean-preserving spread in the distribution of marginal costs.
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- Finkelshtain, Israel & Kislev, Yoav, 1997. "Prices versus Quantities: The Political Perspective," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 83-100, February.
- 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.
- Louis Kaplow & Steven Shavell, 2002.
"On the Superiority of Corrective Taxes to Quantity Regulation,"
American Law and Economics Review,
Oxford University Press, vol. 4(1), pages 1-17, January.
- Louis Kaplow & Steven Shavell, 1997. "On the Superiority of Corrective Taxes to Quantity Regulation," NBER Working Papers 6251, National Bureau of Economic Research, Inc.
- 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.
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