Abstract

Policy instruments in the area of environmental pollution include both market‐based instruments like taxes, and command‐and‐control instruments like non‐transferable quotas. The focus of the analysis is on the relative merits of these two types of instruments in the face of uncertainty, which may take a number of forms. The uncertainty may, for example, concern the magnitude of the benefits or the extent to which polluters actually comply with the government's policies. Economists usually prefer market‐based instruments because they are more likely to lead to Pareto optimal outcomes, and a crucial issue is whether uncertainty is likely to lead to a reversal of this preference.