The Role of Stocks and Shocks Concepts in the Debate Over Price Versus Quantity Open Access
First Online: 25 November 2012 Accepted: 29 October 2012 DOI:
Cite this article as: Parsons, J.E. & Taschini, L. Environ Resource Econ (2013) 55: 71. doi:10.1007/s10640-012-9614-y Abstract
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.
Keywords Cap and trade Permanent shocks Tax Transitory shocks
Part of Parsons’ research was supported by the MIT Center for Energy and Environmental Policy Research and the MIT Joint Program on the Science and Policy of Global Change and by a grant from the Doris Duke Charitable Foundation. Part of Taschini’s research was supported by the Grantham Research Institute on Climate Change and by the Centre for Climate Change Economics and Policy, which is funded by the UK Economic and Social Research Council (ESRC) and Munich Re. This draft has benefited from helpful comments from Sam Fankhauser, Cameron Hepburn, Jake Jacoby, Gib Metcalf, John Reilly, Mort Webster and Federica Buricco and participants in the MIT Emissions Prediction and Policy Analysis seminar.
Download to read the full article text References
Fischer C, Springborn M (2011) Emissions targets and the real business cycle: intensity targets versus caps or taxes. J Environ Econ Manag 62: 352–366
Heutel G (2012) How should environmental policy respond to business cycles? Optimal policy under persistent productivity shocks. Rev Econ Dyn 15: 244–264
Hoel M, Karp L (2001) Taxes and quotas for a stock pollutant with multiplicative uncertainty. J Pub Econ 82: 91–114
Hoel M, Karp L (2002) Taxes versus quotas for a stock pollutant. Resour Energy Econ 24: 367–384
Karp L, Zhang J (2005) Regulation of stock externalities with correlated abatement costs. Environ Resour Econ 32: 273–299
Kelly DL (2005) Price and quantity regulation in general equilibrium. J Econ Theory 125: 36–60
Newell RG, Pizer AW (2003) Regulating stock externalities under uncertainty. J Environ Econ Manag 45: 416–432
Nordhaus WD (1994) Managing the global commons. MIT Press, Cambridge
Parsons JE, Taschini L (2011) The role of stocks and shocks concepts in the debate over price vs. quantity. MIT CEEPR working paper 11-002.
Pizer WA (1999) The optimal choice of policy in the presence of uncertainty. Resour Energy Econ 21: 255–287
Stern N (2006) The economics of climate change. The stern review. Cambridge University Press, Cambridge
Weitzman ML (1974) Prices vs quantities. Rev Econ Stud 41(4): 683–691
Yohe GW (1978) Towards a general comparison of price controls and quantity controls under uncertainty. Rev Econ Stud 45(2): 229–238
CrossRef Copyright information
© The Author(s) 2012
Open AccessThis article is distributed under the terms of the Creative Commons Attribution License which permits any use, distribution, and reproduction in any medium, provided the original author(s) and the source are credited.