Prices or Quantities Dominate Banking and Borrowing


The possibility of intertemporal banking and borrowing of tradeable permits is often viewed as tilting the various policy debates about optimal pollution control instruments toward favoring such time-flexible quantities. The present paper shows that this view is incorrect for a natural dynamic extension of the original 'prices vs. quantities' information structure that allows the firms to know and act upon the realization of uncertain future costs two full periods ahead of the regulators. For any given circumstance, this paper shows that either a fixed price or a fixed quantity is superior in expected welfare to time-flexible banking and borrowing. Furthermore, the standard original formula for the comparative advantage of prices over quantities contains sufficient information to completely characterize the regulatory role of intertemporal banking and borrowing. The logic and implications of these results are analyzed and discussed.
JEL Codes: Q50, Q51, Q52, Q54, Q58
Keywords: prices, quantities, prices versus quantities, regulatory instruments, pollution, climate change


Last updated on 01/10/2018