On the Informational Superiority of Quantities Over Prices in the Presence of an Externality

In this study we investigate the convexity of the profit function of a regulated firm with respect to the random shocks in the marginal costs and the demand intercept, and its implications regarding information disclosure when these shocks are revealed to the firm at a future stage. We illustrate that information disclosure is attained when the firm is regulated through the use of a quantity rather than a price instrument. To do so, we argue that increased convexity obtained under complete information is a sufficient condition. As a policy implication, we suggest a new argument which favors the use of quantities over prices. These implications are more pronounced once we allow for multiple firms.