Prices vs. Quantities: The Political Perspective

Regulation regimes subject to influence of interest groups are compared. It is shown that allocation of the regulated commodity varies with the implemented control and that the advantage of prices (vs. quotas) increases with the elasticity of the demand or the supply of the commodity and decreases with the number of organized producers in the regulated industry. Control regimes can be ranked for negative, but not for positive, externalities. An optimal policy combination, mixing prices and quotas, is identified and limitation on its application are discussed