| Abstract: | In the regulation of pollutant emissions, a regulator may treat different sources (with different costs and environmental damage) as though they were the same—for institutional, informational, or transaction cost reasons. This may occur despite the efficiency gains from regulatory differentiation of sources. This issue has been a source of much controversy in the environmental economics literature and is examined here from a theoretical perspective. Using a two pollutant economy, emissions and net social benefits are compared for the case of efficient, differentiated regulation and the case of uniform, undifferentiated regulation of the aggregate of the two pollutants. We show when aggregate emissions will be greater than, equal to, or less than efficient emissions and we derive conditions for each of these three possibilities. Further, we show that when marginal costs and benefits become more steeply sloped, the inefficiency associated with undifferentiated regulation increases. |
