OUTPUT SUBSIDIES AND QUANTITIES UNDER UNCERTAINTY AND FIRM HETEROGENEITY

Jose L. TORRES (University of Malaga)
Bernardo MORENO (University of Malaga)

In this paper we analyse the relative efficiency of two kinds of regulations, quantity restrictions (quotas) and output subsidies in an imperfectly competitive market under the existence of two sources of uncertainty: uncertainty in both marginal costs and prices. Additionally, we consider the existence of firm heterogeneity. We find that if either there is only one source of uncertainty or these two sources of uncertainty are independently distributed, the output subsidy instrument has comparative advantage over the quantity instrument. However when the two sources of uncertainty are not independently distributed, we find that the correlation effects due to uncertainty or firm heterogeneity are likely to reverse the instrument choice.