The Informational Role of Emission Markets: Prices versus Quantities with Dispersed Information about Externalities

I study asymmetric information about the social cost of an externality, as opposed to asymmetric information about private costs of abatement. I show that quantity regulation with bankable permits has an informational advantage because the permit market aggregates dispersed information about social costs. It has the disadvantage of making private costs more uncertain ex ante. I analytically derive the expression for the (dis)advantage of prices over quantities in this setting. I show that a quantity policy can dominate a price policy for any slope of marginal private costs and always dominates when marginal private costs are sufficiently flat.