Prices vs Quantities with Multiple Pollutants

We examine the choice of policy instruments (price, quantity or a mix of the two) when two pollutants are regulated and firms’ abatement costs are private information.

Whether abatement efforts are complements or substitutes is key determining the choice of policies. When pollutants are complements, a mixed policy instrument with a tax on one pollutant and a quota on another is sometimes preferable even if the pollutants are identical in terms of benefits and costs of abatement. Yet, if they are substitutes, the mixed policy is dominated by taxes or quotas.