Prices vs quantitities: the case of risk averse agents

Fridrik Baldursson () and Nils-Henrik von der Fehr

No 01/2002, Memorandum from Oslo University, Department of Economics

Abstract: We explore the efficacy of price and quantity controls as environmental policy instruments in a stochastic setting in which agents are risk averse. We demonstrate that the assumption of risk aversion may improve the performance of a tax relative to that of a system of tradable quotas, and that restricting quota trade may enhance efficiency even though risk aversion in itself limits volumes of trade. The government may be able to improve the performance of a tradable quota system by judicious choice of distribution and amount of initial quotas and by trading pro-actively in the quota market.

Keywords: regulation; effluent taxes; tradable quotas; uncertainty; risk aversion; environmental management (search for similar items in EconPapers)
JEL-codes: D81 H23 L51 Q28 Q38 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2002-02-21
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