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Uncertainty and the Choice of Policy Instruments: A Note On Baumol and Oates Propositions

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  • Ratna Shrestha

Abstract

Baumol and Oates' propositions, the irrelevancy of benefit uncertainty and the importance of cost uncertainty on the choice between a tax and a system of marketable permits, are limited to a large-number case in which the opportunities for victims of pollution to participate in a permit market are non-existent. However, with the evolution of environmental groups and coalitions of victims in neighborhoods, the large-number case can easily transform into a small-number case. This paper shows that when the pollution standard, set at what appears to be optimal ex ante, is excessively lenient, the system of marketable permits offers such groups a flexibility to buy pollution permits in a competitive market and destroy them until the optimal solution is realized. In the reverse situation, however, Baumol and Oates propositions are unambiguously valid. Copyright Kluwer Academic Publishers 1998

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  • Ratna Shrestha, 1998. "Uncertainty and the Choice of Policy Instruments: A Note On Baumol and Oates Propositions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 12(4), pages 497-505, December.
    • Handle: RePEc:kap:enreec:v:12:y:1998:i:4:p:497-505
    DOI: 10.1023/A:1008208111834
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    References listed on IDEAS

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    1. Ledyard, John O. & Szakaly-Moore, Kristin, 1994. "Designing organizations for trading pollution rights," Journal of Economic Behavior & Organization, Elsevier, vol. 25(2), pages 167-196, October.
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    Cited by:

    1. Andrew Yates & Daniel English, 2007. "Citizens' demand for permits and Kwerel''s incentive compatible mechanism for pollution control," Economics Bulletin, AccessEcon, vol. 17(4), pages 1-9.
    2. Smith, Stefani C. & Yates, Andrew J., 2003. "Optimal pollution permit endowments in markets with endogenous emissions," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 425-445, November.
    3. Rousse, Olivier, 2008. "Environmental and economic benefits resulting from citizens' participation in CO2 emissions trading: An efficient alternative solution to the voluntary compensation of CO2 emissions," Energy Policy, Elsevier, vol. 36(1), pages 388-397, January.
    4. Malueg, David A. & Yates, Andrew J., 2006. "Citizen participation in pollution permit markets," Journal of Environmental Economics and Management, Elsevier, vol. 51(2), pages 205-217, March.
    5. Asproudis, Elias & Weyman-Jones, Tom, 2011. "Third parties �participation in tradable permits market. Do we need them?," MPRA Paper 28766, University Library of Munich, Germany.
    6. Zylicz, Tomasz, 2003. "Instruments for water management at the drainage basin scale," Ecological Economics, Elsevier, vol. 47(1), pages 43-51, November.
    7. Peifang Yang & Daniel T. Kaffine, 2016. "Community-Based Tradable Permits for Localized Pollution," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(4), pages 773-788, December.
    8. repec:ebl:ecbull:v:17:y:2007:i:4:p:1-9 is not listed on IDEAS

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