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Correct (and misleading) arguments for using market based pollution control policies

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  • Karp, Larry S.

Abstract

Disagreement over the form of regulation of greenhouse gasses motivates a comparison of market based and command and control policies. More efficient policies can increase aggregate marginal abatement cost, resulting in higher emissions. Multiple investment equilibria and “regulatory uncertainty” arise when firms anticipate command and control policies. Market based policies eliminate this uncertainty. Command and control policies cause firms to imitate other firms’ investment decisions, leading to similar costs and small potential efficiency gains from trade. Market based policies induce firms to make different investment decisions, leading to different costs and large gains from trade. We imbed the regulatory problem in a “global game” and show that the unique equilibrium to that game is constrained socially optimal.

Suggested Citation

  • Karp, Larry S., 2008. "Correct (and misleading) arguments for using market based pollution control policies," CUDARE Working Papers 42868, University of California, Berkeley, Department of Agricultural and Resource Economics.
    • Handle: RePEc:ags:ucbecw:42868
    DOI: 10.22004/ag.econ.42868
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    Cited by:

    1. Karp, Larry S. & Stevenson, Megan, 2012. "Green industrial policy: trade and theory," CUDARE Working Papers 123637, University of California, Berkeley, Department of Agricultural and Resource Economics.
    2. Larry Karp & Jiangfeng Zhang, 2016. "Taxes Versus Quantities for a Stock Pollutant with Endogenous Abatement Costs and Asymmetric Information," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 493-533, Springer.
    3. Larry Karp & Jinhua Zhao, 2010. "International Environmental Agreements: Emissions Trade, Safety Valves and Escape Clauses," Revue économique, Presses de Sciences-Po, vol. 61(1), pages 153-182.
    4. Narita, Daiju, 2011. "Climate policy as expectation management?," Kiel Working Papers 1681, Kiel Institute for the World Economy (IfW Kiel).
    5. Narita, Daiju, 2010. "Climate policy as expectation management?," Kiel Working Papers 1624, Kiel Institute for the World Economy (IfW Kiel).

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