In a model of nonpoint source pollution, we extend the theory of ambient taxes to the case when polluters might cooperate. We show that regulation through ambient taxes is severely constrained when the degree of cooperation among polluters is unknown to the regulator. On the other hand, if the regulator can invest in costly monitoring of emissions, then the optimal regulation offers a low ambient tax to cooperative groups and an optimal but costly individual emission tax to non-cooperative groups. This mechanism also has attractive properties when risk-aversion is introduced.
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Find related papers by JEL classification: D62 - Microeconomics - - Welfare Economics - - - Externalities D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
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