2158. Environmental policy under risk aversion: Prices versus quantities
Invited abstract in session TB-44: Equilibrium modelling in energy markets, stream Energy Economics & Management.
Tuesday, 10:30-12:00Room: Newlyn 1.01
Authors (first author is the speaker)
| 1. | Trine Krogh Boomsma
|
| Department of Mathematical Sciences, University of Copenhagen | |
| 2. | Afzal Siddiqui
|
| Computer and Systems Sciences, Stockholm University |
Abstract
Mechanisms to regulate environmental externalities such as can be divided into price instruments and quantity instruments, examples being a tax and a quota system, respectively. In a deterministic setting, both instruments achieve maximal welfare (Kolstad, 2009). In the presence of uncertainty, however, the expected welfare loss may diverge (Weizman, 1974). Here, we take the perspective of a risk-averse regulator that anticipates the behavior of a perfectly competitive industry producing an externality. By establishing a bi-level mean-variance optimization problem for this Stackelberg game, we investigate the impact of risk aversion on the optimal price or quantity regulation and the resulting expected welfare and risk. Under a quantity instrument comparative statics show that the industry output is reduced with the degree of risk-aversion. Somewhat surprisingly, under a price instrument, the tax rate declines and expected output increases with risk-aversion. Furthermore, with a sufficient degree of risk-aversion the welfare loss is always less under the price instrument than under the quantity instrument. In contrast, risk mitigation is more effective under the quantity scheme than under the price scheme.
Keywords
- Energy Policy and Planning
- Game Theory
- Economic Modeling
Status: accepted
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