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The Role of Stocks and Shocks Concepts in the Debate Over Price Versus Quantity

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  • John Parsons
  • Luca Taschini

Abstract

Recent literature showed that the choice between a price or quantity control depends, in part, on the dynamic structure of cost uncertainty. Temporary shocks to abatement cost favors the use of a price control, while permanent shocks favor a quantity control. Unfortunately, the importance of this assumption to the optimal choice has not yet received wide attention among economists. We analyze the regulatory sproblem in an alternative setting and reproduce these results. Our contribution is the simplicity of the model and the accessibility of the results, which reinforce the critical role played by the assumed structure of uncertainty. Copyright The Author(s) 2013

Suggested Citation

  • John Parsons & Luca Taschini, 2013. "The Role of Stocks and Shocks Concepts in the Debate Over Price Versus Quantity," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 55(1), pages 71-86, May.
    • Handle: RePEc:kap:enreec:v:55:y:2013:i:1:p:71-86
    DOI: 10.1007/s10640-012-9614-y
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    References listed on IDEAS

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    1. Fischer, Carolyn & Springborn, Michael, 2011. "Emissions targets and the real business cycle: Intensity targets versus caps or taxes," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 352-366.
    2. Hoel, Michael & Karp, Larry, 2000. "Taxes and Quotas for a Stock Pollutant with Multiplicative Uncertainty," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9v86p5s7, Department of Agricultural & Resource Economics, UC Berkeley.
    3. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, vol. 24(4), pages 367-384, November.
    4. Hoel, Michael & Karp, Larry, 2001. "Taxes and quotas for a stock pollutant with multiplicative uncertainty," Journal of Public Economics, Elsevier, vol. 82(1), pages 91-114, October.
    5. Garth Heutel, 2012. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 244-264, April.
    6. Kelly, David L., 2005. "Price and quantity regulation in general equilibrium," Journal of Economic Theory, Elsevier, vol. 125(1), pages 36-60, November.
    7. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
    8. John E. Parsons & Luca Taschini, 2011. "The role of stocks and shocks concepts in the debate over price vs. quantity," GRI Working Papers 43, Grantham Research Institute on Climate Change and the Environment.
    9. 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.
    10. Larry Karp & Jiangfeng Zhang, 2005. "Regulation of Stock Externalities with Correlated Abatement Costs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 32(2), pages 273-300, October.
    11. Garth Heutel, 2012. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 244-264, April.
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    Cited by:

    1. Doda, Baran & Quemin, Simon & Taschini, Luca, 2019. "Linking permit markets multilaterally," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    2. Anna Grodecka & Karlygash Kuralbayeva, 2014. "The Price vs Quantity debate: climate policy and the role of business cycles," OxCarre Working Papers 137, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    3. Botor, Benjamin & Böcker, Benjamin & Kallabis, Thomas & Weber, Christoph, 2021. "Information shocks and profitability risks for power plant investments – impacts of policy instruments," Energy Economics, Elsevier, vol. 102(C).
    4. Shreekar Pradhan & J. Scott Holladay & Mohammed Mohsin & Shreekar Pradhan, 2015. "Environmental Policy Instruments and Uncertainties Under Free Trade and Capital Mobility," EcoMod2015 8102, EcoMod.
    5. Tang, Bao-Jun & Wang, Xiang-Yu & Wei, Yi-Ming, 2019. "Quantities versus prices for best social welfare in carbon reduction: A literature review," Applied Energy, Elsevier, vol. 233, pages 554-564.
    6. Jinhua Zhao, 2022. "Aggregate emission intensity targets: Applications to the Paris Agreement," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1875-1897, October.

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    More about this item

    Keywords

    Cap and trade; Permanent shocks; Tax; Transitory shocks; H23; Q28; Q50; Q58;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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