The optimal pricing of pollution when enforcement is costly

We consider the pricing of a uniformly mixed pollutant with a model of optimal, possibly firm-specific, emissions taxes and their enforcement under incomplete information about firms’ abatement costs, enforcement costs, and pollution damage. We argue that optimality requires an enforcement strategy...

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Bibliographic Details
Published in:Journal of environmental economics and management 2009-09, Vol.58 (2), p.183-191
Main Authors: Stranlund, John K., Chávez, Carlos A., Villena, Mauricio G.
Format: Article
Language:English
Subjects:
Asymmetric information
Compliance
Compliance Enforcement Emissions taxes Monitoring Asymmetric information Uncertainty
Costs
Emissions taxes
Enforcement
Environmental regulations
Environmental tax
Firm theory
Gain
Law enforcement
Model testing
Monitoring
Optimization
Pollution abatement
Pollution control
Pollution control costs
Pollution sources
Pricing
Regulators
Strategy
Studies
Tax systems
Taxes
Uncertainty
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Summary:We consider the pricing of a uniformly mixed pollutant with a model of optimal, possibly firm-specific, emissions taxes and their enforcement under incomplete information about firms’ abatement costs, enforcement costs, and pollution damage. We argue that optimality requires an enforcement strategy that induces full compliance by every firm, except possibly when a regulator can base the probabilities of detecting individual violations on observable correlates of violators’ actual emissions. Moreover, optimality requires discriminatory taxes, except when a regulator is unable to use observable firm-level characteristics to gain some information about the variation in firms’ abatement costs or monitoring costs.
ISSN:0095-0696
1096-0449
DOI:10.1016/j.jeem.2008.12.002