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Prices versus Quantities with Policy Updating
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Prices versus Quantities with Policy Updating

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  • William A. Pizer
  • Brian C. Prest

Abstract

Weitzman shows that the welfare advantage of price versus quantity regulation turns on the relative slopes of marginal costs and benefits when policy is set before uncertain shocks are known. Policy updating over time changes this result. Under intertemporally tradable quantity regulation, permit prices are determined by firms’ expectations about future policy updates, and the advantage of prices versus quantities instead turns on firms’ expectations of policy changes. If firms accurately predict policy changes and the government maximizes welfare, quantity regulation can achieve the first best. Price regulation, lacking an intertemporal link, cannot. The preference tilts back toward prices under more realistic assumptions where governments set policy inefficiently or firms imperfectly anticipate policy changes. In general, the advantage turns on information and expectations, not relative slopes. Given the prevalence of intertemporally tradable permits and policy updates, our results suggest new considerations in the choice between price and quantity regulation.

Suggested Citation

  • William A. Pizer & Brian C. Prest, 2020. "Prices versus Quantities with Policy Updating," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(3), pages 483-518.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/707142
    DOI: 10.1086/707142
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    References listed on IDEAS

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    1. Fell, Harrison & MacKenzie, Ian A. & Pizer, William A., 2012. "Prices versus quantities versus bankable quantities," Resource and Energy Economics, Elsevier, vol. 34(4), pages 607-623.
    2. Yates, Andrew J. & Cronshaw, Mark B., 2001. "Pollution Permit Markets with Intertemporal Trading and Asymmetric Information," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 104-118, July.
    3. Gary W. Yohe, 1978. "Towards a General Comparison of Price Controls and Quantity Controls under Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(2), pages 229-238.
    4. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
    5. Brian C. Murray & Richard G. Newell & William A. Pizer, 2009. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 84-103, Winter.
    6. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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