The optimal linear alternative to price and quantity controls in the multifirm case |
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Authors: | Gordon Karp Gary W Yohe |
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Institution: | 1. Department of Economics, The University at Albany, Albany, New York 12222, USA;2. Department of Economics, Wesleyan University, Middletown, Connecticut 06457, USA |
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Abstract: | Linear control schedules in output have been shown superior in the one-firm case to either of the extreme controls—price or quantity; they optimally trade off the desirable characteristics of both extremes. When many firms are regulated, however, that superiority fades. Then total output affects expected benefits and can display a larger (or smaller) variance than the sum of individual firms' output variances (upon which expected costs depend) if costs are positively (negatively) correlated. Output variation must be discouraged (encouraged), therefore, and the linear schedule rotates toward the quantity (price) extreme. The better extreme might thereby become the best choice among all three alternatives. |
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