Prices vs. Quantities: Why Environmentalists Oppose the Market (So Far)

Theory: Scholars have long acknowledged that regulations based on price mechanisms are the most efficient means of pollution abatement, yet environmentalists have tended to oppose them in favor of quantity restrictions. The conventional explanation that environmentalists are either uninformed or behaving irrationally when they oppose the market underestimates their capacity to act in their own interest. Hypothesis: Environmentalist opposition to price mechanisms maximizes pollution abatement when voters are uncertain about the benefits and costs of regulation. Method: A game theoretic model is developed that shows the initial interaction between environmentalists and the median voter, and how this interaction changes environmentalists' strategy over time. Results: Voter uncertainty creates an informational benefit in favor of quantity regulations. If the informational benefit outweighs the efficiency gain from price regulations, environmentalists will propose quantity regulations. As voters gain information over time the strength of the informational benefit declines which causes environmentalists to switch to market mechanisms, especially mixed regimes like tradable permits that combine relative certainty of environmental benefits with the efficiency gains of the market.