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

Larry S. Karp

No 1063, Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: Disagreement over the form of regulation of greenhouse gasses motivates a comparison of market based and command and control policies. More efficient policies can increase aggregate marginal abatement cost, resulting in higher emissions. Multiple investment equilibria and "regulatory uncertainty" arise when firms anticipate command and control policies. Market based policies eliminate this uncertainty. Command and control policies cause firms to imitate other firms' investment decisions, leading to similar costs and small potential efficiency gains from trade. Market based policies induce firms to make different investment decisions, leading to different costs and large gains from trade. We imbed the regulatory problem in a "global game" and show that the unique equilibrium to that game is constrained socially optimal.

Keywords: tradable permits; coordination games; multiple equilibria; global games; regulatory uncertainty; climate change policies; California AB32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Date: 2008-08-02
Note: oai:cdlib1:are_ucb-1259
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Working Paper: Correct (and misleading) argument for using market-based pollution control policies (2008)
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