Stocks & Shocks : A Clarification in the Debate Over Price vs . Quantity Controls for Greenhouse Gases 11 - 002

Many economists and policy makers have long favoured price instruments based on the fact that climate chance involves stock pollutants and as such probably exhibits relatively flat marginal benefits. We construct two simple examples that help to clarify the role of uncertainty in the analysis of price or quantity controls of stock pollutants. Our contribution is the simplicity of the model and the sharp nature of the results. In the case of temporary shocks, the cost minimizing policy can be implemented by a quantity control. Conversely, in the case of permanent shocks, the cost minimizing policy can be implemented by a price control. Consistent with previous literature, we show that the attractiveness of a policy instrument hinges on the nature of the cost shock, once again establishing the ambiguity of the choice.