CORRELATED UNCERTAINTY AND POLICY INSTRUMENT CHOICE

For two decades, environmental economists have generally maintained th at benefit uncertainty is irrelevant for choosing between price and qu antity instruments, but that cost uncertainty matters, with the identi ty of the efficient instrument depending upon the relative slopes of t he marginal benefit and cost functions. But, in the presence of simult aneous, correlated uncertainty, such policy instrument recommendations may be inappropriate. With plausible values of relevant parameters, t he conventional identification of a price instrument will be reversed, to favor instead a quantity instrument. The opposite reversal-from th e choice of a quantity instrument to a price instrument-seems less lik ely to occur. (C) 1996 Academic Press, Inc.