Indexed regulation

Journal Article

Seminal work by Weitzman [Prices vs. quantities, Rev. Econ. Stud. 41 (1974) 477-491] revealed prices are preferred to quantities when marginal benefits are relatively flat compared to marginal costs. We extend this comparison to indexed policies, where quantities are proportional to an index, such as output. We find that policy preferences hinge on additional parameters describing the first and second moments of the index and the ex post optimal quantity level. When the ratio of these variables' coefficients of variation divided by their correlation is less than approximately two, indexed quantities are preferred to fixed quantities. A slightly more complex condition determines when indexed quantities are preferred to prices. Applied to climate change policy, we find that the range of variation and correlation in country-level carbon dioxide emissions and GDP suggests the ranking of an emissions intensity cap (indexed to GDP) compared to a fixed emission cap is not uniform across countries; neither policy clearly dominates the other. © 2008 Elsevier Inc. All rights reserved.

Full Text

Duke Authors

Cited Authors

  • Newell, RG; Pizer, WA

Published Date

  • 2008

Published In

Volume / Issue

  • 56 / 3

Start / End Page

  • 221 - 233

International Standard Serial Number (ISSN)

  • 0095-0696

Digital Object Identifier (DOI)

  • 10.1016/j.jeem.2008.07.001