Prices vs. Quantities with incomplete enforcement and different enforcement probabilities

Moritz Rohling

No 24, Proceedings of the German Development Economics Conference, Hannover 2010 from Verein für Socialpolitik, Research Committee Development Economics

Abstract: Regulating inter-country externalities, like climate change, raises various enforcement problems. It is often argued that international pricebased 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 for cases where costs and benefits are uncertain and enforcement of quantity regimes is stricter than for price-based regimes. We show that under these conditions, instrument choice solely based on the relative slopes of the marginal costs can be inefficient. If enforcement probabilities differ, 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 difference in welfare for both policy instruments also depends on the variance of the marginal abatement costs. Furthermore, 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; environmental regulation; uncertainty (search for similar items in EconPapers)
JEL-codes: D8 K42 L51 Q58 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cmp, nep-ene, nep-env and nep-reg
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Citations: View citations in EconPapers (2)

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