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Prices versus quantities with incomplete enforcement

Juan Pablo Montero

Journal of Public Economics 85: 435-454 ?? 2002 with permission from Elsevier Science(USA). ScienceDirectTM

Juan Pablo Montero, Journal of Public Economics 85: 435-454 2002 with permission from Elsevier Science(USA). ScienceDirectTM

I study whether incomplete enforcement of a regulation has any impact on the choice between price (e.g., taxes) and quantity (e.g., tradeable quotas) instruments. Results indicate that a second-best design accounting for incomplete enforcement can be implemented equally well with either instrument as long as the benefit and cost curves are known with certainty. If these curves are uncertain to the regulator, however, the quantity instrument performs relatively better than the price instrument. The reason is the effective amount of control under the quantity instrument is no longer fixed, which makes this instrument come closer to a non-linear instrument.

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