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Prices or Quantities Dominate Banking and Borrowing

Author

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  • Martin L. Weitzman

Abstract

The possibility of intertemporal banking and borrowing of tradeable permits is often viewed as tilting the various policy debates about optimal pollution control instruments toward favoring such time-flexible quantities. The present paper shows that this view is misleading, at least for the simplest dynamic extension of the original `prices vs. quantities' information structure. The model of this paper allows the firms to know and act upon the realization of uncertain future costs two full periods ahead of the regulators. For any given circumstance, the paper shows that either a fixed price or a fixed quantity is superior in expected welfare to time-flexible banking and borrowing. Furthermore, the standard original formula for the comparative advantage of prices over quantities contains sufficient information to completely characterize the regulatory role of intertemporal banking and borrowing. The logic and implications of these results are analyzed and discussed.

Suggested Citation

  • Martin L. Weitzman, 2018. "Prices or Quantities Dominate Banking and Borrowing," NBER Working Papers 24218, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24218
    Note: EEE
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    Citations

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    Cited by:

    1. Wang, Banban & Pizer, William A. & Munnings, Clayton, 2022. "Price limits in a tradable performance standard," Journal of Environmental Economics and Management, Elsevier, vol. 116(C).
    2. Olli-Pekka Kuusela & Jussi Lintunen, 2020. "A Cap-and-Trade Commitment Policy with Allowance Banking," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(3), pages 421-455, March.
    3. Garth Heutel, 2018. "Bankable Prices," NBER Working Papers 25235, National Bureau of Economic Research, Inc.
    4. John Bennett, 2022. "Rationed price controls and “prices versus quantities”," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1364-1385, December.
    5. Schaufele, Brandon, 2019. "Demand Shocks Change the Excess Burden From Carbon Taxes," MPRA Paper 92132, University Library of Munich, Germany.
    6. Simon Quemin & Raphael Trotignon, 2018. "Competitive Permit Storage and Market Design: An Application to the EU-ETS," Working Papers 2018.19, FAERE - French Association of Environmental and Resource Economists.
    7. Reyer Gerlagh & Roweno J.R.K. Heijmans, 2018. "Regulating Stock Externalities," CESifo Working Paper Series 7383, CESifo.
    8. Svenn Jensen & Christian P. Traeger & Christian Träger, 2021. "Pricing Climate Risk," CESifo Working Paper Series 9196, CESifo.
    9. 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.
    10. Reyer Gerlagh & Roweno J.R.K. Wan, 2018. "Optimal Stabilization in an Emission Permits Market," CESifo Working Paper Series 6950, CESifo.
    11. Karp, Larry & Traeger, Christian, 2024. "Taxes versus quantities reassessed," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).

    More about this item

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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