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Dynamic incentive regulation of diffuse pollution

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  • La Nauze, Andrea
  • Mezzetti, Claudio

Abstract

Diffuse pollution from agriculture and extractive industries reduces air and water quality and contributes to climate change. We consider a setting in which a regulator must incentivize unobserved abatement given that firms have limited liability, and when they can enter and exit. We demonstrate that a simple dynamic incentive scheme can solve this difficult regulatory problem: firms pay a constant tax and receive rebates following periods of low pollution. We apply the model to water pollution from a fracking operation and simulate the contract to explore the volatility of the firm's payments and the costs of limited liability.

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  • La Nauze, Andrea & Mezzetti, Claudio, 2019. "Dynamic incentive regulation of diffuse pollution," Journal of Environmental Economics and Management, Elsevier, vol. 93(C), pages 101-124.
    • Handle: RePEc:eee:jeeman:v:93:y:2019:i:c:p:101-124
    DOI: 10.1016/j.jeem.2018.11.009
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