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Price-Based Vs. Quantity-Based Environmental Regulation Under Knightian Uncertainty: An Info-Gap Robust Satisficing Perspective, John K. Stranlund, Yakov Ben-Haim

John K. Stranlund

Conventional wisdom among environmental economists is that the relative slopes of the marginal social benefit and marginal social cost functions determine whether a price-based or quantity-based environmental regulation leads to higher expected social welfare. We revisit the choice between price-based vs. quantity-based environmental regulation under Knightian uncertainty; that is, when uncertainty cannot be modeled with known probability distributions. Under these circumstances, the policy objective cannot be to maximize the expected net benefits of emissions control. Instead, we evaluate an emissions tax and an aggregate abatement standard in terms of maximizing the range of uncertainty under which the welfare loss from …