Prices vs. quantities in presence of a second, unpriced, externality

Guy Meunier (1, 2)

1 X - École polytechnique
2 ALISS - Alimentation et sciences sociales

We study a situation in which two goods jointly generate an externality but only one of them is regulated. Unilateral regulation of greenhouse gas emissions and related carbon leakage is a well known example. We compare tax and quantity instruments under uncertainty à la Weitzman (1974). Because of the uncertainty surrounding the unregulated good, the external cost is stochastic with both instruments. Whether the unregulated good quantity is more or less variable under a tax or under a quota depends on the degree of substitutability and the correlation between uncertainties on private valuations. In case of a positive correlation and imperfect substitution, a tax better stabilize the unregulated good quantity and can therefore dominate a quota when the slope of the external cost associated to the unregulated good is large. In a specification, relevant for leakage, it is shown that if uncertainty about the unregulated good (imports) is large, a tax might be preferable to a quota, regardless of the convexity of the external cost.

Mots clés: Environmental regulation; Tax; Quotas; Multi-pollutant; Carbon leakage

Domaines: Economies et finances

Guy Meunier. Prices vs. quantities in presence of a second, unpriced, externality. 2015. ⟨hal-01242040⟩