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Dynamic Taxes and Quotas with Learning

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  • Karp, Larry

Abstract

We compare dynamic taxes and quotas in a stationary environment where a regulator and a non-strategic firm have asymmetric information. The regulator is able to learn about the unknown cost parameter either by using a tax or a quota that is slack with positive probability. With a tax, the information asymmetry is resolved in one period. Optimal learning using a quota is less transparent, though we show that this search problem has a simple solution. In particular, it is never optimal for the regulator to learn gradually. In the first period, he either ignores the possibility of learning, or he tries to improve his information. Regardless of the outcome in the first period, he never experiments in subsequent periods. We use this result to assess the informational advantage of taxes compared to quotas under asymmetric information.

Suggested Citation

  • Karp, Larry, 2004. "Dynamic Taxes and Quotas with Learning," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt8pg8s922, Department of Agricultural & Resource Economics, UC Berkeley.
    • Handle: RePEc:cdl:agrebk:qt8pg8s922
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    References listed on IDEAS

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    Cited by:

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    3. Fabio Antoniou & Nikos Tsakiris, 2016. "On the Informational Superiority of Quantities Over Prices in the Presence of an Externality," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(1), pages 227-250, September.
    4. Kelly, David L., 2005. "Price and quantity regulation in general equilibrium," Journal of Economic Theory, Elsevier, vol. 125(1), pages 36-60, November.
    5. Arguedas, Carmen & Rousseau, Sandra, 2012. "Learning about compliance under asymmetric information," Resource and Energy Economics, Elsevier, vol. 34(1), pages 55-73.
    6. Tang, Bao-Jun & Wang, Xiang-Yu & Wei, Yi-Ming, 2019. "Quantities versus prices for best social welfare in carbon reduction: A literature review," Applied Energy, Elsevier, vol. 233, pages 554-564.
    7. Springborn, Michael R., 2014. "Risk aversion and adaptive management: Insights from a multi-armed bandit model of invasive species risk," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 226-242.
    8. Strand, Jon, 2013. "Strategic climate policy with offsets and incomplete abatement: Carbon taxes versus cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 202-218.
    9. Diekert, Florian K., 2015. "Threatening Thresholds? The effect of disastrous regime shifts on the cooperative and non-cooperative use of environmental goods and services," Memorandum 12/2015, Oslo University, Department of Economics.
    10. Kellogg, Ryan, 2018. "Gasoline price uncertainty and the design of fuel economy standards," Journal of Public Economics, Elsevier, vol. 160(C), pages 14-32.
    11. Diekert, Florian K., 2017. "Threatening thresholds? The effect of disastrous regime shifts on the non-cooperative use of environmental goods and services," Journal of Public Economics, Elsevier, vol. 147(C), pages 30-49.
    12. Rolf Groeneveld & Michael Springborn & Christopher Costello, 2014. "Repeated Experimentation to Learn About a Flow-Pollutant Threshold," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(4), pages 627-647, August.
    13. Jon Strand, 2010. "Taxes versus Cap-and-Trade in Climate Policy when only some Fuel Importers Abate," CESifo Working Paper Series 3233, CESifo.

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