Pigou Regulation under Delayed Uncertainty Resolution
Abstract
We analyze the regulation of an externality with risky social cost whose level becomes known only after a delay. For three models - one-period consumption, one-period production, and two-period consumption-saving -, we show that the full-information equilibrium, that accounts for the realized social cost, is always associated with a positive social value of information as compared to purely ex-ante Pigou regulation. We discuss ways to capture part of this social value by designing policies with state-contingent ex-post taxes or ex-post transfers. We compare those designs for different policy instruments, including taxes and tradable permits. The paper contributes to the debate on the acceptability of environmental policy in the face of aggregate risk.