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Prices versus Quantities with Policy Updating

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  • William A. Pizer
  • Brian Prest

Abstract

This paper considers how policy updates and trading of regulated quantities over time changes the traditional comparative advantage of prices versus quantities. Quantity regulation that can be traded over time leads firms to set current prices equal to expected future prices. A government seeking to maximize net societal benefits can take advantage of this behavior with a sequence of quantity policy updates that achieves the first best in all periods. Under price regulation where current prices remain fixed until future policy changes occur, no such opportunity exists to achieve the first best, and prices are never preferred. However, if we assume policy updates are driven in part by political "noise" rather than maximizing net societal benefits, the result changes and prices can again be preferred. The comparative advantage now depends the relative variance of noise shocks compared to true cost and benefit shocks. This contrasts sharply with the traditional comparative advantage that depends on the relative slopes of marginal costs and benefits. Applied to climate change, we estimate the comparative advantage of intertemporally tradable quantities (over prices) to be $2 billion over five years. This estimate grows if updates occur less frequently or could be made negative by political noise.

Suggested Citation

  • William A. Pizer & Brian Prest, 2016. "Prices versus Quantities with Policy Updating," NBER Working Papers 22379, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22379
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    References listed on IDEAS

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    1. 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.
    2. Brian C. Murray & Richard G. Newell & William A. Pizer, 2009. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 84-103, Winter.
    3. Yates, Andrew J. & Cronshaw, Mark B., 2001. "Pollution Permit Markets with Intertemporal Trading and Asymmetric Information," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 104-118, July.
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    Cited by:

    1. Kellogg, Ryan, 2020. "Output and attribute-based carbon regulation under uncertainty," Journal of Public Economics, Elsevier, vol. 190(C).
    2. Doda, Baran & Quemin, Simon & Taschini, Luca, 2019. "Linking permit markets multilaterally," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    3. Robert I. Harris & William A. Pizer, 2020. "Using Taxes to Meet an Emission Target," NBER Working Papers 27781, National Bureau of Economic Research, Inc.
    4. Kollenberg, Sascha & Taschini, Luca, 2016. "Emissions trading systems with cap adjustments," Journal of Environmental Economics and Management, Elsevier, vol. 80(C), pages 20-36.
    5. Grischa Perino & Robert A. Ritz & Arthur van Benthem, 2019. "Overlapping Climate Policies," NBER Working Papers 25643, National Bureau of Economic Research, Inc.
    6. Martin L. Weitzman, 2020. "Prices or Quantities Can Dominate Banking and Borrowing," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(2), pages 437-463, April.
    7. Olli-Pekka Kuusela & Jussi Lintunen, 2020. "A Cap-and-Trade Commitment Policy with Allowance Banking," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(3), pages 421-455, March.
    8. Garth Heutel, 2018. "Bankable Prices," NBER Working Papers 25235, National Bureau of Economic Research, Inc.
    9. Robert N. Stavins, 2020. "The Future of US Carbon-Pricing Policy," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 1(1), pages 8-64.
    10. Simon Quemin & Raphael Trotignon, 2018. "Competitive Permit Storage and Market Design: An Application to the EU-ETS," Working Papers 2018.19, FAERE - French Association of Environmental and Resource Economists.
    11. Reyer Gerlagh & Roweno J.R.K. Heijmans, 2018. "Regulating Stock Externalities," CESifo Working Paper Series 7383, CESifo.
    12. Kellogg, Ryan, 2018. "Gasoline price uncertainty and the design of fuel economy standards," Journal of Public Economics, Elsevier, vol. 160(C), pages 14-32.
    13. Reyer Gerlagh & Roweno J. R. K. Heijmans & Knut Einar Rosendahl, 2020. "COVID-19 Tests the Market Stability Reserve," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 76(4), pages 855-865, August.
    14. Stavins, Robert N., 2019. "The Future of U.S. Carbon-Pricing Policy: Normative Assessment and Positive Prognosis," Working Paper Series rwp19-017, Harvard University, John F. Kennedy School of Government.
    15. Jihad C. Elnaboulsi & Wassim Daher & Yigit Saglam, 2020. "Environmental Taxation, Information Precision, and Information Sharing," Working Papers 2020-04, CRESE.

    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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