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Prices vs. Quantities with Fiscal Cushioning

Moritz Rohling and Markus Ohndorf ()

No 10-11, IED Working paper from IED Institute for Environmental Decisions, ETH Zurich

Abstract: Regulating international externalities, like climate change, raises various enforcement problems. It is often argued that international price-based regulations (e.g. emission taxes) are more difficult to enforce than quantity-based regulations (e.g. tradable pollution permits). In this paper, we analyze the relative performance of price-based and quantity-based instruments when costs and benefits are uncertain and enforcement of quantity regimes is stricter than that of price regimes. We show that under these conditions, instrument choice solely based on the relative slopes of the marginal curves can yield inefficient results. If policy enforcement differs, rational policy choice should also take into account the level of the marginal benefit curve, as well as institutional parameters. In contrast to earlier analyses on "Prices vs. Quantities", we find that the choice of instrument also depends on the variance of the marginal abatement costs. Numerical simulations of our stylized model suggest that, for climate policies, quantity-regulations might well be preferable to price-based approaches after all.

Keywords: market-based instruments; incomplete enforcement; uncertainty; environmental regulation (search for similar items in EconPapers)
JEL-codes: D8 L51 K42 Q58 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2010-07
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Journal Article: Prices vs. Quantities with fiscal cushioning (2012) Downloads
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