The Role of Stocks and Shocks Concepts in the Debate Over Price Versus Quantity
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.
KeywordsCap and trade Permanent shocks Tax Transitory shocks
JEL ClassificationH23 Q28 Q50 Q58
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