ABSTRACT
Standard economic theory states that regulation by price is more efficient than regulation by command and control. This chapter shows that when the government cares not only about economic efficiency, but also about inducing firms to make some investment, then the government may prefer to regulate by command rather than by price. Governments usually regulate by command and control, rather than by pricing. The usual advantage of pricing is that it gives added flexibility—consumers or firms have a choice of what to do. But a government which cares about inducing investment may prefer to regulate by command and control. The Weitzman model, however, cannot justify using command-and-control regulation of fuel-efficiency or of automobile emissions. Following the energy crisis of 1973, Congress adopted the Energy Policy and Conservation Act, which mandated minimum corporate average fuel economy standards for all new cars sold in the United States.
