Prices Versus Quantities with Incomplete Enforcement

Download or read book Prices Versus Quantities with Incomplete Enforcement written by Juan-Pablo Montero and published by . This book was released on 1999 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper extends Weitzman's (1974) "Prices vs. Quantities" to allow for incomplete enforcement. Whether the regulator uses prices (e.g., taxes) or quantities (e.g., tradeable quotas), a first-best design is always inefficient in the presence of incomplete enforcement. A second-best design that incorporates incomplete enforcement, and where cost and benefit curves are known with certainty, can be implemented equally well with either instrument. If benefit and cost curves are uncertain, however, a quantity instrument performs better than a price instrument. In fact, if the slopes of the marginal cost and marginal benefit curves are equal, quantities are always preferred over prices. Results are consistent to alternative enforcement policies.