Question

Uncertainty of costs or benefits makes determining the optimal policy response difficult. With this in mind, explain when quantity mechanisms, e.g. permits, might be more appropriate than price mechanisms, e.g. taxes.

Answer 1

In my opinion, price mechanism is better in allocating resources rather than keeping quantity restrictions.Price mechanism through taxes lead to a new equilibrium. Quantity restrictions disturb the equilibrium and either excess or deficit is created n the market without leading to an equilibrium.

It should also be considered that taxes are better as they are able to differentiate between merit goods and demerit goods. Quantity restrictions will not be able to do this and may lead to black marketing or goods quality deterioration.

However, sometimes quantity mechanism can be better than taxes.

1. When there is perfect information about market demand supply.Quantity mechanism can be better to reduce costs and enhance benefits.

2. Example can be tradable permits. In this case polluting factories can be made to limit pollution in a particular quantity. Firms which are able to do so will be incentivized to sell it non followers.

3.Pollution under control certificates work with quantity emission limits.