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This paper studies
the relative efficiency of two kinds of regulations, quantity
restrictions (quotas) and output subsidies, in an imperfectly
competitive market in the presence of two sources of uncertainty,
costs and prices. We find that when these two sources of uncertainty
are independently distributed, the output subsidy instrument has a
comparative advantage over the quantity instrument. However, when we
take into account the possibility of correlation between the random
components and across firms' marginal costs, we find that a positive
(negative) correlation tends to favor the quantity (subsidy)
instrument. Finally, we show that when the correlation is positive,
it is possible to find situations in which the quantity instrument
has comparative advantages over the subsidy instrument. |