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Correct (and misleading) argument for using market-based pollution control policies

Larry S. Karp

No 6030, 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: One argument in favor of market based pollution control policies is sometimes exaggerated, and a different argument is usually ignored. Regardless of whether investment is fixed or endogenous, market based policies might lead to a higher or lower equilibrium abatement compared to the level under command and control policies. Therefore, economists should be cautious about trying to convince anti-market environmentalists of the benefit of market based policies on the grounds that these promote environmental goals. However, market based policies reduce regulatory uncertainty. Under command and control emissions policies, there are multiple rational expectations competitive equilibria at the investment stage. From the standpoint of individual firms, this multiplicity looks like regulatory uncertainty. Market based policies eliminate this uncertainty. These results hold in an environment with common knowledge about market fundamentals. In a global games setting the unique investment equilibrium under command and control emissions policies is constrained efficient.

Keywords: tradable permits; coordination games; multiple equilibria; global games; regulatory uncertainty; climate change policies; California AB32; Environmental Economics and Policy; C79; L51; Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Date: 2008
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Working Paper: Correct (and misleading) arguments for using market based pollution control policies (2008) Downloads
Working Paper: Correct (and misleading) arguments for using market based pollution control policies (2008) Downloads
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