Uncertainty and the choice of pollution control instruments

This paper compares the relative efficiencies of pollution taxes, pollution standards, and the auctioning of pollution rights when the marginal damage function or marginal control cost are subject to uncertainty. In the first case, we find that all instruments yield the same expected social surplus. In the latter case, the choice of the optimal instrument depends, in general, on the relative elasticities of the marginal damage and marginal expected cost functions, on the way in which uncertainty enters the model, and on the distribution of the error term. Policy conclusions are derived.