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Prices vs. Quantities vs. Tradable Quantities

  • Roberton Williams

This paper extends Weitzman's (1974) seminal paper comparing price and quantity instruments for regulation to consider a third option: tradable quantity regulations, such as tradable permits. Contrary to what prior work has suggested, fixed quantities may be more efficient than tradable quantities if the regulated goods are not perfect substitutes, even when trading ratios are based on the ratio of expected marginal benefits between goods, not simply one-for-one. Indeed, when benefits are independent across goods, or when the goods are complements, tradable quantities are never the most efficient instrument. This theory is applied to dynamic pollution problems, and suggests that permit banking should be allowed for stock pollutants, but not for flow pollutants. These results indicate that many regulations, including the current sulfur dioxide trading program and proposed greenhouse gas regulations, are inefficient.

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File URL: http://www.nber.org/papers/w9283.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9283.

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Date of creation: Oct 2002
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Handle: RePEc:nbr:nberwo:9283
Note: ED PE EEE
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  1. Andrew Yates, 2002. "Decentralization in Pollution Permit Markets," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 641-660, October.
  2. Greenwood, Jeremy & McAfee, R Preston, 1991. "Externalities and Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 103-21, February.
  3. Louis Kaplow & Steven Shavell, 1997. "On the Superiority of Corrective Taxes to Quantity Regulation," NBER Working Papers 6251, National Bureau of Economic Research, Inc.
  4. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, vol. 24(4), pages 367-384, November.
  5. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
  6. Montero, Juan-Pablo, 2001. "Multipollutant Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 762-74, Winter.
  7. Vickrey, William, 1993. "Today's Task for Economists," American Economic Review, American Economic Association, vol. 83(1), pages 1-10, March.
  8. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
  9. McGartland, Albert M. & Oates, Wallace E., 1985. "Marketable permits for the prevention of environmental deterioration," Journal of Environmental Economics and Management, Elsevier, vol. 12(3), pages 207-228, September.
  10. Vickrey, William, 1992. "Chock-Full Employment without Increased Inflation: A Proposal for Marketable Markup Warrants," American Economic Review, American Economic Association, vol. 82(2), pages 341-45, May.
  11. Kling, Catherine L. & Rubin, Jonathan, 1997. "Bankable Permits for the Control of Environmental Pollution," Staff General Research Papers 1479, Iowa State University, Department of Economics.
  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. Alessandra Casella, 1999. "Tradable deficit permits:efficient implementation of the Stability Pact in the European Monetary Union," Economic Policy, CEPR;CES;MSH, vol. 14(29), pages 321-362, October.
  14. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-91, September.
  15. Pizer, William & Newell, Richard, 1998. "Regulating Stock Externalities Under Uncertainty," Discussion Papers dp-99-10-rev, Resources For the Future.
  16. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
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