Prices versus quantities in forest regulation

Abstract

We revisit an unanswered and yet critical question in forest policy design: does a price or quantity instrument achieve a better social outcome when the government does not have perfect information. This is a common question in environmental regulation, but in the forest policy literature an equivalence between these instruments has historically been presented, albeit under perfect information. In the forestry case one might be tempted to simply defer to Weitzman (1974), who derived rules for prices versus quantity policy choices when either marginal abatement costs or marginal benefits of polluting emissions are unknown to the policy maker. These rules may not be transferrable to the forestry problem, however. We develop a framework of marginal costs and benefits based on a standard rotation model, showing that uncertainty leads to (very) different results than in the emissions literature. For example, we find that the slopes of marginal costs and benefits and the difference between the expected values of uncertain parameters and their realizations matter differently for the forest policy case. We also find that symmetric over- and under-estimation around true parameter values can result in asymmetric changes in marginal cost curves. Most importantly, we find that even the size of this difference now matters to the price versus quantity policy choice. Our results both draw into question whether Weitzman rules simply apply to forest resources, and they suggest that our new approach should be used for evaluating alternative forestry policies to achieve public goods goals.