Prices vs. Quantities: Robust Regulation

Zi Yang Kang

Papers from arXiv.org

Abstract: This paper revisits the classic instrument choice problem in a setting with consumption externalities, through the lens of robust mechanism design. A regulator chooses among all nonlinear pricing schedules to maximize worst-case welfare, knowing the distribution of consumption preferences and the average marginal externality but not the underlying joint distribution. The optimal policy is a quantity control: a floor for positive externalities and a ceiling for negative externalities. Knowing whether individuals with stronger consumption preferences tend to generate larger or smaller marginal externalities can instead make a uniform tax or subsidy optimal. The framework therefore provides a welfare-based rationale for simple forms of price and quantity regulation.

Date: 2026-03, Revised 2026-09
New Economics Papers: this item is included in nep-des, nep-mic and nep-reg
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