Environmental and Resource Economics

, Volume 55, Issue 1, pp 71–86 | Cite as

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

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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 

JEL Classification

H23 Q28 Q50 Q58 

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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.

Authors and Affiliations

  1. 1.Sloan School of Management MITMassachusetts Institute of TechnologyCambridgeUSA
  2. 2.The Grantham Research Institute on Climate Change and the EnvironmentLondon School of Economics and Political ScienceLondonUK

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