Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases
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...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | en_US |
| Published: |
MIT Center for Energy and Environmental Policy Research
2011
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| Online Access: | http://hdl.handle.net/1721.1/66271 |
| _version_ | 1811077931615649792 |
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| author | Parsons, John E. Taschini, Luca |
| author_facet | Parsons, John E. Taschini, Luca |
| author_sort | Parsons, John E. |
| collection | MIT |
| description | 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. |
| first_indexed | 2024-09-23T10:50:34Z |
| format | Working Paper |
| id | mit-1721.1/66271 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T10:50:34Z |
| publishDate | 2011 |
| publisher | MIT Center for Energy and Environmental Policy Research |
| record_format | dspace |
| spelling | mit-1721.1/662712019-04-12T14:55:46Z Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases Parsons, John E. Taschini, Luca 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. Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research 2011-10-17T15:25:04Z 2011-10-17T15:25:04Z 2011-03 Working Paper 2011-002 http://hdl.handle.net/1721.1/66271 en_US MIT-CEEPR;2011-002 An error occurred on the license name. An error occurred getting the license - uri. application/pdf MIT Center for Energy and Environmental Policy Research |
| spellingShingle | Parsons, John E. Taschini, Luca Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases |
| title | Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases |
| title_full | Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases |
| title_fullStr | Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases |
| title_full_unstemmed | Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases |
| title_short | Stocks & Shocks: A Clarification in the Debate Over Price vs. Quantity Controls for Greenhouse Gases |
| title_sort | stocks shocks a clarification in the debate over price vs quantity controls for greenhouse gases |
| url | http://hdl.handle.net/1721.1/66271 |
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