Regulation of Stock Externalities with Correlated Abatement Costs

Karp, L.S. and Zhang, J. (2005) Regulation of Stock Externalities with Correlated Abatement Costs Environmental and Resource Economics, 32, (2), pp. 273-300. (doi:10.1007/s10640-005-4678-6).


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We study a dynamic regulation model where firms’ actions contribute to a stock externality. The regulator and firms have asymmetric information about serially correlated abatement costs. With price-based policies such as taxes, or if firms trade quotas efficiently, the regulator learns about the evolution of both the stock and costs. This ability to learn about costs is important in determining the ranking of taxes and quotas, and in determining the value of a feedback rather than an open-loop policy. For a range of parameter values commonly used in global warming studies, taxes dominate quotas, regardless of whether the regulator uses an open-loop or a feedback policy, and regardless of the extent of cost correlation.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1007/s10640-005-4678-6
ISSNs: 0924-6460 (print)
Keywords: asymmetric information, choice of instruments, correlated costs, learning, pollution control

ePrint ID: 39701
Date :
Date Event
Date Deposited: 29 Jun 2006
Last Modified: 16 Apr 2017 21:54
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