Prices vs. Quantities: Robust Regulation

Zi Yang Kang

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arXiv · 2603.15832

Prices vs. Quantities: Robust Regulation

Zi Yang Kang

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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.

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Zi Yang Kang. 2026-03-16. Prices vs. Quantities: Robust Regulation. https://arxiv.org/abs/2603.15832

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