Output subsidies and quotas under uncertainty and firm heterogeneity

Bernardo Moreno () and Jose Torres ()

No E2005/24, Economic Working Papers at Centro de Estudios Andaluces from Centro de Estudios Andaluces

Abstract: This paper studies the relative efficiency of two kinds of regulations, quantity restrictions (quotas) and output subsidies, in an imperfectly competitive market under the existence of two sources of uncertainty: uncertainty in both costs and prices. We find that when the two sources of uncertainty are independently distributed, the output subsidy instrument has comparative advantage over the quantity instrument. However, when we take into account the possibility of correlation between the random components and across firms marginal costs, we find that a positive (negative) correlation tends to favor the quantity (subsidy) instrument. Finally, we show that when the correlation is positive, it is possible to find situations in which the quantity instrument has comparative advantage over the subsidy instrument.

Keywords: Cost uncertainty; demand uncertainty; firm heterogeneity; output subsidy and quantity instruments (search for similar items in EconPapers)
JEL-codes: D8 L51 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2005
New Economics Papers: this item is included in nep-mic
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Related works:
Journal Article: Output Subsidies and Quotas under Uncertainty and Firm Heterogeneity (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:cea:doctra:e2005_24

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