Uncertainty and the Choice of Policy Instruments: A Note On Baumol and Oates Propositions

Ratna Shrestha

Environmental & Resource Economics, 1998, vol. 12, issue 4, 497-505

Abstract: Baumol and Oates' propositions, the irrelevancy of benefit uncertainty and the importance of cost uncertainty on the choice between a tax and a system of marketable permits, are limited to a large-number case in which the opportunities for victims of pollution to participate in a permit market are non-existent. However, with the evolution of environmental groups and coalitions of victims in neighborhoods, the large-number case can easily transform into a small-number case. This paper shows that when the pollution standard, set at what appears to be optimal ex ante, is excessively lenient, the system of marketable permits offers such groups a flexibility to buy pollution permits in a competitive market and destroy them until the optimal solution is realized. In the reverse situation, however, Baumol and Oates propositions are unambiguously valid. Copyright Kluwer Academic Publishers 1998

Keywords: externality; policy instruments; regulatory uncertainty; tradable pollution rights (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (8)

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DOI: 10.1023/A:1008208111834

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