Chapter VIII.13: Prices versus quantities

Abstract

Within the world of market mechanisms, two parallel ideas have been formative in the developing discourse on environmental policy: a "price instrument" through a Pigouvian tax, and a "quantity instrument" through a Dalesian emissions trading instrument. Over time, these simple theoretical ideas have developed variants out of political and administrative necessity, which have blurred distinctions and sometimes detracted from the environmental and economic advantages of market mechanisms. That said, a juxtaposition of price instruments with quantity instruments is useful for comparing the administrative and welfare implications. This chapter reviews the relative advantages and disadvantages of price and quantity instruments, with a special concern for climate policy.