AEA Papers and Proceedings
ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)
The Informational Role of Emission Markets: Prices versus Quantities with Dispersed Information about Externalities
AEA Papers and Proceedings
(pp. 544–550)
Abstract
I study asymmetric information about the social cost of an externality, as opposed to asymmetric information about private costs of abatement. I show that quantity regulation with bankable permits has an informational advantage because the permit market aggregates dispersed information about social costs. It has the disadvantage of making private costs more uncertain ex ante. I analytically derive the expression for the (dis)advantage of prices over quantities in this setting. I show that a quantity policy can dominate a price policy for any slope of marginal private costs and always dominates when marginal private costs are sufficiently flat.Citation
Lemoine, Derek. 2026. "The Informational Role of Emission Markets: Prices versus Quantities with Dispersed Information about Externalities." AEA Papers and Proceedings 116: 544–550. DOI: 10.1257/pandp.20261067Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D62 Externalities
- D82 Asymmetric and Private Information; Mechanism Design
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- Q54 Climate; Natural Disasters and Their Management; Global Warming
- Q58 Environmental Economics: Government Policy