Adjustable Quantities

Alex Dickson and Ian MacKenzie
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Alex Dickson: Department of Economics, Strathclyde Business School, University of Strathclyde, Glasgow, UK, G4 0QU.

No 669, Discussion Papers Series from University of Queensland, School of Economics

Abstract: This article investigates the relative efficiency of soft-price (‘allowance reserve’) regulation versus hard-price (‘safety-valve’) regulation in the presence of uncertainty. When policy variables are treated as exogenous the relative efficiency ranking is ambiguous. A small allowance reserve and low trigger price (relative to the expected price on the market) will favor hard-price regulation. This efficiency ranking diminishes as the allowance reserve increases in size (and the trigger price increases). Similar results exist when the regulator is constrained in selecting policy parameters (where the trigger price is chosen given a fixed allowance reserve). If the regulator has an unrestricted choice over policy parameters, soft-price regulation is (weakly) superior. The findings show that the relative efficiency of hybrid mechanisms is crucially dependent on the political economy aspects of the choice of policy parameters.

Keywords: allowance reserve; price ceiling; prices versus quantities (search for similar items in EconPapers)
JEL-codes: D62 D72 D81 Q53 Q58 (search for similar items in EconPapers)
Date: 2025-02
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:669

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