 Prices vs quantities with risk aversionEdward E. Schlee Journal of Public Economics, 2025, vol. 249, issue C Abstract: Weitzman (1974) asks whether we should regulate a good by fixing quantity or by fixing price when cost and benefit are uncertain. His welfare criterion—expected aggregate surplus—tacitly imposes two strong quasilinearity assumptions on a consumer’s preferences: neutrality with respect to income risk; and absence of income effects on the valuation of the good. Both are matters of first-order importance for the evaluation of allocations under uncertainty. Here I ask how risk aversion affects the choice between the two when the regulated good is a public good. I give conditions for welfare—in the form of the sum of certainty equivalents—to be higher for a fixed price; the conditions allow arbitrarily-high levels of risk aversion, even though consumers bear no uncertainty about quantity or income with a fixed quantity. The conclusion depends crucially on benefit uncertainty, present but irrelevant in Weitzman. An unintended consequence is a surprising new argument against quantity regulation: risk aversion. Keywords: Public/environmental goods; Prices vs quantities; Expected surplus; Risk aversion; Benefit uncertainty (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:249:y:2025:i:c:s0047272725001616 DOI: 10.1016/j.jpubeco.2025.105463 Access Statistics for this article Journal of Public Economics is currently edited by R. Boadway and J. Poterba More articles in Journal of Public Economics from Elsevier |
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