Environmental and Resource Economics

, Volume 55, Issue 1, pp 71-86

First online:

Open Access This content is freely available online to anyone, anywhere at any time.

The Role of Stocks and Shocks Concepts in the Debate Over Price Versus Quantity

  • John E. ParsonsAffiliated withSloan School of Management MIT, Massachusetts Institute of Technology Email author 
  • , Luca TaschiniAffiliated withThe Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science


Recent literature showed that the choice between a price or quantity control depends, in part, on the dynamic structure of cost uncertainty. Temporary shocks to abatement cost favors the use of a price control, while permanent shocks favor a quantity control. Unfortunately, the importance of this assumption to the optimal choice has not yet received wide attention among economists. We analyze the regulatory sproblem in an alternative setting and reproduce these results. Our contribution is the simplicity of the model and the accessibility of the results, which reinforce the critical role played by the assumed structure of uncertainty.


Cap and trade Permanent shocks Tax Transitory shocks

JEL Classification

H23 Q28 Q50 Q58