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This paper studies the relative
efficiency of two kinds of regulations, quantity
restrictions (quotas) and output subsidies, in an
imperfectly competitive market in the presence of two
sources of uncertainty, costs and prices. We find that
when these two sources of uncertainty are independently
distributed, the output subsidy instrument has a
comparative advantage over the quantity instrument.
However, when we take into account the possibility of
correlation between the random components and across
firms' marginal costs, we find that a positive
(negative) correlation tends to favor the quantity
(subsidy) instrument. Finally, we show that when the
correlation is positive, it is possible to find
situations in which the quantity instrument has
comparative advantages over the subsidy instrument.
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