TY  - JOUR
AU  - Newell,Richard G.
AU  - Pizer,William A.
TI  - Indexed Regulation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13991
PY  - 2008
Y2  - May 2008
UR  - http://www.nber.org/papers/w13991
L1  - http://www.nber.org/papers/w13991.pdf
N1  - Author contact info:
Richard G. Newell
Nicholas School of the Environment
Duke University
Box 90227
Durham, NC 27708
Tel: 919/681-8663
Fax: 919/684-5833
E-Mail: richard.newell@duke.edu

William A. Pizer
Sanford School of Public Policy
Duke University
Box 90312
Durham, NC 27708
Tel: 919/613-9286
Fax: 877/240-9880
E-Mail: billy.pizer@duke.edu
AB  - Seminal work by Weitzman (1974) revealed prices are preferred to quantities when marginal benefits are relatively flat compared to marginal costs. We extend this comparison to indexed policies, where quantities are proportional to an index, such as output. We find that policy preferences hinge on additional parameters describing the first and second moments of the index and the ex post optimal quantity level. When the ratio of these variables' coefficients of variation divided by their correlation is less than approximately two, indexed quantities are preferred to fixed quantities. A slightly more complex condition determines when indexed quantities are preferred to prices. Applied to climate change policy, we find that the range of variation and correlation in country-level carbon dioxide emissions and GDP suggests the ranking of an emissions intensity cap (indexed to GDP) compared to a fixed emission cap is not uniform across countries; neither policy clearly dominates the other.
ER  -