Seminarios académicos y conferencias
Tradable permit schemes for congestible facilities with variable supply and demand
11 Noviembre 2016 - 13
112, Facultad de Ciencias Económicas y Administrativas UC
There is a large economics literature on the relative merits of price and quantity controls for alleviating externalities and other market failures. Under idealized conditions the two instruments are equivalent, but they are not equivalent with uncertainty. As Weitzman (1974) and others have shown, under uncertainty their welfare ranking depends on the relative slopes of the marginal benefit and marginal cost functions.
Weitzman’s work has spawned an extensive literature in environmental economics that has informed the debate between using carbon taxes and cap-and-trade schemes for tackling climate change. More recently, a literature has developed on the use of Tradable Permit Schemes (TPS) to control road traffic congestion, but virtually all studies have assumed that travel conditions remain constant over time. The goal of this paper is to rank TPS and congestion pricing in terms of allocative efficiency when travel supply and/or demand conditions vary, either predictably or unpredictably. Agents are assumed to learn conditions before they make their decisions, but tolls and permit quantities remain the same each day. This setting differs from Weitzman’s in two main respects. First, the costs of congestion are borne by users, whereas with pollution the costs are incurred by the general population. Congestion provides a negative feedback on usage that limits the costs that congestion can impose. Second, the constraint on total travel imposed by a TPS may not bind if travel demand is particularly low, or if (private) travel costs are particularly high.
Due to these differences our results differ from Weitzman’s. In particular, the relative slopes of the demand (or benefit) and cost curves do not play a major role in ranking TPS and tolls. The ranking depends on various other factors: the nature of shocks (e.g., additive or multiplicative), the functional forms of the demand and cost curves, the probabilities of good and bad states, and whether the permit constraint always binds. In the case of linear demand and cost curves, a toll is unambiguously welfare-superior to a TPS under plausible conditions. However, in some instances (e.g., if there is an absolute capacity constraint on usage) a TPS can be superior.