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Price-Based vs. Quantity-Based Environmental Regulation under Knightian Uncertainty: An Info-Gap Robust Satisficing Perspective

John Stranlund () and Yakov Ben-Haim ()
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Yakov Ben-Haim: Mechanical Engineering Technion, Israel Institute of Technology

No 2006-1, Working Papers from University of Massachusetts Amherst, Department of Resource Economics

Abstract: Conventional wisdom among environmental economists is that the relative slopes of the marginal social benefit and marginal social cost functions determine whether a price-based or quantity-based environmental regulation leads to higher expected social welfare. We revisit the choice between price-based vs. quantity-based environmental regulation under Knightian uncertainty; that is, when uncertainty cannot be modeled with known probability distributions. Under these circumstances, the policy objective cannot be to maximize the expected net benefits of emissions control. Instead, we evaluate an emissions tax and an aggregate abatement standard in terms of maximizing the range of uncertainty under which the welfare loss from error in the estimates of the marginal benefits and costs of emissions control can be limited. The main result of our work is that the same criterion involving the relative slopes of the marginal benefit and cost functions determines whether price-based or quantity-based control is more robust to unstructured uncertainty. Hence, not only does the relative slopes criterion lead to the policy that maximizes the expected net benefits of control under structured uncertainty, it also leads to the policy that maximizes robustness to unstructured uncertainty.

Keywords: emissions control; environmental regulation; info-gap; Knightian uncertainty; robustness; satisficing (search for similar items in EconPapers)
JEL-codes: D81 L51 Q58 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2006-07
New Economics Papers: this item is included in nep-agr, nep-cbe, nep-env and nep-reg
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