Prices or Quantities Dominate Banking and Borrowing

26 Pages Posted: 19 Jan 2018

See all articles by Martin Weitzman

Martin Weitzman

Harvard University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 12, 2018

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: prices, quantities, prices versus quantities, banking and borrowing, regulatory instruments, pollution, climate change

JEL Classification: Q50, Q51, Q52, Q54, Q58

Suggested Citation

Weitzman, Martin L., Prices or Quantities Dominate Banking and Borrowing (January 12, 2018). Available at SSRN: https://ssrn.com/abstract=3101185 or http://dx.doi.org/10.2139/ssrn.3101185

Martin L. Weitzman (Contact Author)

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
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617-495-5133 (Phone)

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