Abstract
We compare emissions taxes and quotas when a (strategic) regulator and (non-strategic) firms have asymmetric information about abatement costs, and all agents use Markov perfect decision rules. Firms make investment decisions that affect their future abatement costs. For general functional forms, firms’ investment policy is information-constrained efficient when the regulator uses a quota, but not when the regulator uses an emissions tax. This advantage of quotas over emissions taxes has not previously been recognized. For a special functional form (linear–quadratic) both policies are constrained efficient. Using numerical methods, we find that a tax has some advantages in this case.
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Jiangfeng Zhang: The opinions expressed in this paper do not necessarily reflect the views of the Asian Development Bank.
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Karp, L., Zhang, J. Taxes versus quantities for a stock pollutant with endogenous abatement costs and asymmetric information. Econ Theory 49, 371–409 (2012). https://doi.org/10.1007/s00199-010-0561-y
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DOI: https://doi.org/10.1007/s00199-010-0561-y