Regulation by Prices, Quantities, or Both: A Review of Instrument Choice

Cameron J. Hepburn ()

Oxford Review of Economic Policy, 2006, vol. 22, issue 2, pages 226-247

Abstract: Choosing appropriate policy instruments is an important part of successful regulation. Once objectives are agreed and suitable targets adopted, policy-makers can employ command-and-control regulation and/or economic instruments, and choose between fixing a price or a quantity. This paper examines the relative advantages of price, quantity, and hybrid instruments according to: their efficiency under uncertainty; the trade-off between credible commitment and flexibility; implementation; international considerations; and political economy. Various illustrations of the theory are provided, with two detailed applications to climate change and transport policy, specifically congestion and 'safety pricing'. Copyright 2006, Oxford University Press.

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