Prices vs. Quantities: Robust Regulation
General Economics
2026-03-18 v1 Economics
Abstract
This paper revisits the classic instrument choice problem in a setting with consumption externalities, through the lens of robust mechanism design. A regulator can implement any incentive-compatible policy but is uncertain about how individual demand is correlated with marginal externalities, and evaluates policies by worst-case welfare. The optimal policy is a quantity control: a floor for positive externalities and a ceiling for negative externalities. If the sign of the correlation is known, a uniform tax or subsidy can be optimal. The framework also applies to regulatory uncertainty and costly screening, providing a welfare-based explanation for the prevalence of non-price policies.
Keywords
Cite
@article{arxiv.2603.15832,
title = {Prices vs. Quantities: Robust Regulation},
author = {Zi Yang Kang},
journal= {arXiv preprint arXiv:2603.15832},
year = {2026}
}