Correct (and misleading) arguments for using market based pollution control policies

Disagreement over the form of regulation of greenhouse gasses motivates a comparison of market based and command and control policies. More efficient policies can increase aggregate marginal abatement cost, resulting in higher emissions. Multiple investment equilibria and “regulatory uncertainty” arise when firms anticipate command and control policies. Market based policies eliminate this uncertainty. Command and control policies cause firms to imitate other firms’ investment decisions, leading to similar costs and small potential efficiency gains from trade. Market based policies induce firms to make different investment decisions, leading to different costs and large gains from trade. We imbed the regulatory problem in a “global game” and show that the unique equilibrium to that game is constrained socially optimal.


Issue Date:
Aug 29 2008
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/42868
Total Pages:
24
JEL Codes:
C79; L51; Q58
Series Statement:
CUDARE Working Papers
1063




 Record created 2017-04-01, last modified 2017-04-04

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