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Oxford Review of Economic Policy 2006 22(2):226-247; doi:10.1093/oxrep/grj014
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Oxford Review of Economic Policy vol. 22 no. 2 2006 © The Author (2006). Published by Oxford University Press. All rights reserved.

Regulation by Prices, Quantities, or Both: A Review of Instrument Choice

Cameron Hepburn
St Hugh's College, Environmental Change Institute, and Department of Economics, University of Oxford1

Abstract

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 economic 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 credible commitment 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’.

Footnotes

1 E-mail address: cameron.hepburn{at}economics.ox.ac.uk


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