Controlling a Stock Pollutant with Endogenous Abatement Capital and Asymmetric Information

Larry S. Karp and Jiangfeng Zhang
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Jiangfeng Zhang: Asian Development Bank

No 928, Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: Non-strategic firms with rational expectations make investment and emissions decisions. The investment rule depends on firms' beliefs about future emissions policies. We compare emissions taxes and quotas when the (strategic) regulator and (nonstrategic) firms have asymmetric information about abatement costs, and all agents use Markov Perfect decision rules. Emissions taxes create a secondary distortion at the investment stage, unless a particular condition holds; emissions quotas do not create a secondary distortion. We solve a linear-quadratic model calibrated to represent the problem of controlling greenhouse gases. The endogeneity of abatement capital favors taxes, and it increases abatement.

Keywords: pollution control; investment; asymmetric information; rational expectations; choice of instruments (search for similar items in EconPapers)
Date: 2002-12-10
Note: oai:cdlib1:are_ucb-1048
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