Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases
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2011-002.pdf
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521.73 KB
Format
Adobe PDF
Checksum (MD5)
2767fc57774198ea0ec0962955c14ba1
Author(s)
Parsons, John E.
Taschini, Luca
Date Issued
March 2011
Publisher
MIT Center for Energy and Environmental Policy Research
Series/Report no.
MIT-CEEPR;2011-002
Abstract
We construct two simple examples that help to clarify the role of a key assumption
in the analysis of price or quantity controls of greenhouse gases in the presence
of uncertain costs. Traditionally much has been made of the fact that greenhouse
gases are a stock pollutant, and that therefore the marginal benefit curve must be
relatively flat. This fact is said to establish the preference of a price control over a
quantity control. The stock pollutant argument is considered dispositive, so that the
preference for price controls is categorical. We show that this argument can only be
true if the uncertainty about cost is a special form: all shocks are transitory. We
show that in the case of permanent shocks, the traditional comparison of marginal
benefits vs. marginal costs is mis-measured. The choice between quantity and price
controls becomes ambiguous again and depends upon a more difficult measurement
of marginal costs and benefits. The simplicity of the examples and the solutions is a
major element of the contribution here. The examples are readily accessible and the
comparison of results under the alternative assumptions of transitory and permanent
shocks is stark.
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