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Output subsidies and quotas under uncertainty and firm heterogeneity

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Abstract
This paper studies the relative efficiency of two kinds of regulations, quantity restrictions (quotas) and output subsidies, in an imperfectly competitive market under the existence of two sources of uncertainty: uncertainty in both costs and prices. We find that when the two sources of uncertainty are independently distributed, the output subsidy instrument has comparative advantage over the quantity instrument. However, when we take into account the possibility of correlation between the random components and across firms marginal costs, we find that a positive (negative) correlation tends to favor the quantity (subsidy) instrument. Finally, we show that when the correlation is positive, it is possible to find situations in which the quantity instrument has comparative advantage over the subsidy instrument.

Suggested Citation

  • Bernardo Moreno Jiménez & José Luis Torres Chacón, 2005. "Output subsidies and quotas under uncertainty and firm heterogeneity," Economic Working Papers at Centro de Estudios Andaluces E2005/24, Centro de Estudios Andaluces.
    • Handle: RePEc:cea:doctra:e2005_24
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    References listed on IDEAS

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    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
    2. repec:bla:jpbect:v:2:y:2000:i:2:p:273-88 is not listed on IDEAS
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    7. Junjie Wu, 2000. "Input Substitution and Pollution Control under Uncertainty and Firm Heterogeneity," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(2), pages 273-288, April.
    8. Choi, Eun Kwan & Johnson, Stanley R, 1987. "Consumer's Surplus and Price Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 407-411, June.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cost uncertainty; demand uncertainty; firm heterogeneity; output subsidy and quantity instruments;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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