Prices and Symmetries

Abstract

How should policymakers intervene in networks with stochastic spillovers? Price instruments (taxes & subsidies) dominate quantity instruments (quotas) if shocks to the network are sufficiently symmetric so equilibrium allocations adjust endogenously toward the ex-post optimal allocation. Conversely, quantities dominate prices if shocks are sufficiently antisymmetric because equilibrium allocations then adjust away from the ex-post optimal allocation. Our results offer an optimality foundation for price instruments when shocks have a large common component, and for quantity instruments when policymakers are concerned about correlation robustness.

Keywords: Networks, Externalities, Robustness, Prices, Quotas, Taxes