Carbon abatement choice: Administration or market?

Global warming calls for different schemes to mitigate carbon emission. Most of related policy can be classified into two categories: administrative and market. From a micro-level, in this paper, a simple optimization model was developed to clarify impacts of administrative and market carbon emission abatement scheme on firm´s production plan and expected net income when the firm is confronted with a random demand on its product. By calculating firm´s optimal amount of product and corresponding expected net income, we find that command-and-control approach is strictest one. And to some extent, it may cause inefficiency of resources utilization and market failure because this scheme imposes a hard constraint on firm´s product plan. However, schemes such as administrative and market scheme are preferable though they may lead to inefficiency and market failure too, but to less extent. The reason is that without the hard constraint on firm´s product plan, these schemes present more options so the firm can make more profits by trading off between carbon abating and burdening the cost of over-emissions.