Price-Based vs. Quantity-Based Environmental Regulation Under Knightian Uncertainty: An Info-Gap Robust Satisficing Perspective

University of Massachusetts Amherst Resource Economics Working Paper No. 2006-1

20 Pages Posted: 27 Jul 2006

See all articles by John Stranlund

John Stranlund

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics

Yakov Ben-Haim

Technion-Israel Institute of Technology - Faculty of Mechanical Engineering

Date Written: July 2006

Abstract

Conventional wisdom among environmental economists is that the relative slopes of the marginal social benefit and marginal social cost functions determine whether a price-based or quantity-based environmental regulation leads to higher expected social welfare. We revisit the choice between price-based vs. quantity-based environmental regulation under Knightian uncertainty; that is, when uncertainty cannot be modeled with known probability distributions. Under these circumstances, the policy objective cannot be to maximize the expected net benefits of emissions control. Instead, we evaluate an emissions tax and an aggregate abatement standard in terms of maximizing the range of uncertainty under which the welfare loss from error in the estimates of the marginal benefits and costs of emissions control can be limited. The main result of our work is that the same criterion involving the relative slopes of the marginal benefit and cost functions determines whether price-based or quantity-based control is more robust to unstructured uncertainty. Hence, not only does the relative slopes criterion lead to the policy that maximizes the expected net benefits of control under structured uncertainty, it also leads to the policy that maximizes robustness to unstructured uncertainty.

Keywords: emissions control, environmental regulation, info-gap, Knightian uncertainty, robustness, satisficing

JEL Classification: D81, L51, Q58

Suggested Citation

Stranlund, John and Ben-Haim, Yakov, Price-Based vs. Quantity-Based Environmental Regulation Under Knightian Uncertainty: An Info-Gap Robust Satisficing Perspective (July 2006). University of Massachusetts Amherst Resource Economics Working Paper No. 2006-1, Available at SSRN: https://ssrn.com/abstract=920463 or http://dx.doi.org/10.2139/ssrn.920463

John Stranlund (Contact Author)

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics ( email )

Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003-9246
United States
413-545-6328 (Phone)

Yakov Ben-Haim

Technion-Israel Institute of Technology - Faculty of Mechanical Engineering ( email )

Technion City
Haifa 32000, Haifa 32000
Israel

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