Prices vs. Quantities vs. Tradable Quantities

28 Pages Posted: 19 Oct 2002

See all articles by Roberton C. Williams

Roberton C. Williams

University of Maryland - Department of Agricultural & Resource Economics; National Bureau of Economic Research (NBER); Resources for the Future

Date Written: October 2002

Abstract

This paper extends Weitzman's (1974) seminal paper comparing price and quantity instruments for regulation to consider a third option: tradable quantity regulations, such as tradable permits. Contrary to what prior work has suggested, fixed quantities may be more efficient than tradable quantities if the regulated goods are not perfect substitutes, even when trading ratios are based on the ratio of expected marginal benefits between goods, not simply one-for-one. Indeed, when benefits are independent across goods, or when the goods are complements, tradable quantities are never the most efficient instrument. This theory is applied to dynamic pollution problems, and suggests that permit banking should be allowed for stock pollutants, but not for flow pollutants. These results indicate that many regulations, including the current sulfur dioxide trading program and proposed greenhouse gas regulations, are inefficient.

Suggested Citation

Williams, Roberton C., Prices vs. Quantities vs. Tradable Quantities (October 2002). NBER Working Paper No. w9283, Available at SSRN: https://ssrn.com/abstract=341852

Roberton C. Williams (Contact Author)

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