“Prices versus Quantities with Policy Updating”
Abstract: We explore how policy updates and intertemporal trading of regulated quantities change the traditional comparative advantage of prices versus quantities. Intertemporally tradable quantity regulation leads firms to set current prices equal to expected future prices. We show that policy updates can take advantage of this behavior to achieve the first best in all periods so price regulation is never preferred. If we assume policy updates are driven partly by political \noise,” however, prices can be preferred. Applied to climate change, we estimate a $2 billion advantage of quantities versus prices over five years, which could be reversed by political noise.