Regulating by prices, quantities or both: a review of instrument choice
Oxford Review of Economic Policy, 22:2, 226-247, 2006.
Keywords: instrument choice / policy / policy instruments / political economy
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’