Cameron Hepburn

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Regulating by prices, quantities or both: a review of instrument choice

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Choosing appropriate policy instruments is an important part of successful regulation. Once objectives are agreed and suitable targets adopted, policy-makers can employ command-and-control regulation and/or economics instruments, and choose between fixing a price or a quantity. This paper examines the relative advantages of price, quantity and hybrid instruments according to: their efficiency under uncertainty; the trade-off between the credible commitments and flexibility implementation; international considerations; and political economy. Various illustrations of the theory are provided with two detailed applications to climate change and transport policy, specifically congestion and ‘safety pricing’