Indexed regulation
Published
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
- November 1, 2008
Published In
Volume / Issue
- 56 / 3
Start / End Page
- 221 - 233
Electronic International Standard Serial Number (EISSN)
- 1096-0449
International Standard Serial Number (ISSN)
- 0095-0696
Digital Object Identifier (DOI)
- 10.1016/j.jeem.2008.07.001
Citation Source
- Scopus