Working Paper: NBER ID: w24218
Authors: Martin L. Weitzman
Abstract: The possibility of intertemporal banking and borrowing of tradeable permits is often viewed as tilting the various policy debates about optimal pollution control instruments toward favoring such time-flexible quantities. The present paper shows that this view is misleading, at least for the simplest dynamic extension of the original `prices vs. quantities' information structure. The model of this paper allows the firms to know and act upon the realization of uncertain future costs two full periods ahead of the regulators. For any given circumstance, the paper shows that either a fixed price or a fixed quantity is superior in expected welfare to time-flexible banking and borrowing. Furthermore, the standard original formula for the comparative advantage of prices over quantities contains sufficient information to completely characterize the regulatory role of intertemporal banking and borrowing. The logic and implications of these results are analyzed and discussed.
Keywords: Environmental Economics; Pollution Control; Regulatory Instruments
JEL Codes: Q50; Q51; Q52; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed price (D41) | expected welfare (D69) |
| fixed quantity (C69) | expected welfare (D69) |
| time-flexible banking and borrowing (G21) | expected welfare (D69) |
| marginal benefit curve (flatter) (D11) | fixed price preferred over fixed quantity (D41) |
| marginal benefit curve (steeper) (D11) | fixed quantity preferred over fixed price (D41) |
| fixed price or fixed quantity (L11) | dominate intertemporal banking and borrowing in expected welfare (D15) |