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The Weitzman price corner
Institution:1. Climate Economics Chair, Paris-Dauphine University, PSL Research University, France;2. Potsdam Institute for Climate Impact Research, Member of the Leibniz Association, Germany;3. Grantham Research Institute, London School of Economics and Political Science, England, United Kingdom
Abstract:The standard theoretical approach to comparing price and quantity policies is strictly interior. We extend the comparison to account for the possibility of corner outcomes, where a polluting industry responds to a tax by abating either completely or not at all. We show that, when the uncertainty in marginal costs is high, the inclusion of corner outcomes confers an extra and unnoticed advantage upon an emissions tax. In situations where the standard approach would recommend a quantity policy, the possibility of corners can reverse that recommendation.
Keywords:Environmental policy  Prices versus quantities
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