Indexed Regulation

Richard Newell () and William A. Pizer

Discussion Papers from Resources For the Future

Abstract: Seminal work by Weitzman (1974) revealed that prices are preferred to quantities when marginal benefits are relatively flat compared to marginal costs. We extend this comparison to indexed policies, where quantities are proportional to an index, such as output. We find that policy preferences hinge on additional parameters describing the first and second moments of the index and the ex post optimal quantity level. When the ratio of these variables’ coefficients of variation divided by their correlation is less than two, indexed quantities are preferred to fixed quantities. A slightly more complex condition determines when indexed quantities are preferred to prices. Applied to the case of climate change, we find that quantities indexed to GDP are preferred to fixed quantities for about half of the 19 largest emitters, including the United States and China, while (consistent with previous work) prices dominate for all countries.

Keywords: price; quantity; regulation; uncertainty; policy; environment; climate change (search for similar items in EconPapers)
JEL-codes: Q28 D81 C68 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-reg and nep-sea
Date: 2006-06-20
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Related works:
Working Paper: Indexed Regulation (2008)
Journal Article: Indexed regulation (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:rff:dpaper:dp-06-32

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