Regulating Stock Externalities Under Uncertainty

Posted: 4 Sep 2002

See all articles by Richard G. Newell

Richard G. Newell

Duke University - Nicholas School of Environment; National Bureau of Economic Research (NBER); Resources for the Future

William A. Pizer

Duke University

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Using a simple analytical model incorporating benefits of a stock, costs of adjusting the stock, and uncertainty in costs, we uncover several important principles governing the choice of price-based policies (e.g., taxes) relative to quantity-based policies (e.g., tradable permits) for controlling stock externalities. As in Weitzman (1974), the relative slopes of the marginal benefits and costs of controlling the externality continue to be critical determinants of the efficiency of prices relative to quantities, with flatter marginal benefits and steeper marginal costs favoring prices. But some important adjustments for dynamic effects are necessary, including correlation of cost shocks across time, discounting, stock decay, and the rate of benefits growth. Applied to the problem of greenhouse gases and climate change, we find that a price-based instrument generates several times the expected net benefits of a quantity instrument.

Keywords: Stock, externality, policy, regulation, uncertainty, prices, quantities, taxes, tradable permits

JEL Classification: Q28, D81, C68

Suggested Citation

Newell, Richard G. and Pizer, William A., Regulating Stock Externalities Under Uncertainty. Available at SSRN:

Richard G. Newell (Contact Author)

Duke University - Nicholas School of Environment ( email )

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National Bureau of Economic Research (NBER) ( email )

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Resources for the Future ( email )

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William A. Pizer

Duke University ( email )

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