Prices vs. Quantities vs. Tradable Quantities

Roberton Williams

No 9283, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper extends Weitzman's (1974) seminal paper comparing price and quantity instruments for regulation to consider a third option: tradable quantity regulations, such as tradable permits. Contrary to what prior work has suggested, fixed quantities may be more efficient than tradable quantities if the regulated goods are not perfect substitutes, even when trading ratios are based on the ratio of expected marginal benefits between goods, not simply one-for-one. Indeed, when benefits are independent across goods, or when the goods are complements, tradable quantities are never the most efficient instrument. This theory is applied to dynamic pollution problems, and suggests that permit banking should be allowed for stock pollutants, but not for flow pollutants. These results indicate that many regulations, including the current sulfur dioxide trading program and proposed greenhouse gas regulations, are inefficient.

JEL-codes: D81 L51 (search for similar items in EconPapers)
Date: 2002-10
New Economics Papers: this item is included in nep-mic
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Citations: View citations in EconPapers (32)

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