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

Larry Karp

No 42868, CUDARE Working Papers from University of California, Berkeley, Department of Agricultural and Resource Economics

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: Environmental Economics and Policy; Research Methods/Statistical Methods (search for similar items in EconPapers)
Pages: 24
Date: 2008-08-29
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Citations: View citations in EconPapers (5)

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Working Paper: Correct (and misleading) argument for using market-based pollution control policies (2008)
Working Paper: Correct (and misleading) arguments for using market based pollution control policies (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ucbecw:42868

DOI: 10.22004/ag.econ.42868

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