The optimal pricing of pollution when enforcement is costly |
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Authors: | John K Stranlund Carlos A Chvez Mauricio G Villena |
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Institution: | aDepartment of Resource Economics, University of Massachusetts-Amherst, 214 Stockbridge Hall, 80 Campus Center Way, Amherst, MA 01003, USA;bDepartamento de Economía, Universidad de Concepción, Concepción, Chile;cEscuela de Negocios, Universidad Adolfo Ibáñez, Santiago, Chile |
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Abstract: | 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. |
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Keywords: | Compliance Enforcement Emissions taxes Monitoring Asymmetric information Uncertainty |
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