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

One argument in favor of market based pollution control policies is sometimes exaggerated, and a different argument is usually ignored. Regardless of whether investment is fixed or endogenous, market based policies might lead to a higher or lower equilibrium abatement compared to the level under command and control policies. Therefore, economists should be cautious about trying to convince anti-market environmentalists of the benefit of market based policies on the grounds that these promote environmental goals. However, market based policies reduce regulatory uncertainty. Under command and control emissions policies, there are multiple rational expectations competitive equilibria at the investment stage. From the standpoint of individual firms, this multiplicity looks like regulatory uncertainty. Market based policies eliminate this uncertainty. These results hold in an environment with common knowledge about market fundamentals. In a global games setting the unique investment equilibrium under command and control emissions policies is constrained efficient.


Issue Date:
2008
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/6030
Total Pages:
30
JEL Codes:
C79; L51; Q58
Series Statement:
Selected Paper




 Record created 2017-04-01, last modified 2017-08-23

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