The paper deals with the problem of optimal environmental policy under uncertainty. Usually, when an environmental policy is considered, only the expected values of the parameters of the marginal benefit and marginal cost functions associated with the policy are known. Thus a relevant question is: In the presence of uncertainty, what is the optimal policy mean for achieving the environmental objective? The study addresses itself to the specific objective of improving air quality although the analysis is generally applicable. The policy means are emission taxes and emission quotas. It is shown that under uncertainty neither of these means is generally optimal, and that specific parameter values of the costs and benefits relations and their distributions determine the optimal policy for each situation.The idea of internalizing externalities is at least as old as the first writings of Pigou. Studies advocating internalizing externalities of air and water pollution using a taxing scheme appear frequently in press nowadays [l, 2, 4, 5, 171. An alternative to control via taxation is a direct regulatory approach which takes the form of emission quotas (standards). In this paper, we do not discuss the pros and cons of each regulatory system, but rather concentrate on one common problem of standards and Pigouvian tax policies. This common problem is that the optimal levels of the policies are uncertain. The uncertainty of the optimal policy level may stem from the uncertainty of the reduction of damages caused by air pollution or from the uncertainty of the costs associated with lowering pollution. The presence of uncertainty leads to the hypothesis that, in addition to economic efficiency of resource allocation, adjustment costs, and administrative costs, there is another reason that might cause one to prefer a standard to a tax, and vice versa. This paper suggests that the expected social losses due to the randomness of the parameters of the benefit and cost functions of lowering emissions are a relevant criteria.* In the economic literature one can find relatively few discussions on the effect of price uncertainty upon social welfare [7, 10,
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