Environmental Regulation In Vertically Coordinated Industries
AbstractMany notable pollution problems occur in industries where production is carried out under vertical coordination arrangements that are characterized by conditions of double moral hazard. In contrast to situations characterized by full information, we show that standard prescriptions of environmental economics do not apply. Imposing a Pigouvian tax equal to the marginal cost of pollution does not lead to the first best level of pollution. The equilibrium levels of production and pollution are not independent of which agent is taxed. Making either agent or the industry as a whole financially liable for full environmental damage at the margin similarly does not lead to a first best level of pollution. On the contrary, under conditions of double moral hazard, the industry should pay for less than the full cost of environmental damage. At present, only one agent (if any) is typically liable for environmental damage. We derive conditions under which imposing new regulations that make only one agent financially responsible for the full cost of environmental damage (as conventional wisdom in environmental policy suggests) is excessively stringent in that it results in pollution and production that are less than the first best levels. We also show that such new regulations could result in negatively correlated deviations of pollution and production from their first best levels, a situation that cannot arise under conditions of complete information.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Maryland, Department of Agricultural and Resource Economics in its series Working Papers with number 28562.
Date of creation: 2001
Date of revision:
Environmental Economics and Policy; Industrial Organization;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chambers, Robert G. & Quiggin, John, 1996. "Non-point-source pollution regulation as a multi-task principal-agent problem," Journal of Public Economics, Elsevier, vol. 59(1), pages 95-116, January.
- Allen, Douglas W & Lueck, Dean, 1999. "The Role of Risk in Contract Choice," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 704-36, October.
- Gabel H. Landis & Sinclair-Desgagne Bernard, 1993. "Managerial Incentives and Environmental Compliance," Journal of Environmental Economics and Management, Elsevier, vol. 24(3), pages 229-240, May.
- Robert Innes, 2000. "The Economics of Livestock Waste and Its Regulation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(1), pages 97-117.
- Sunding, David L. & Zilberman, David, 1998. "Allocating Product Liability in a Multimarket Setting," International Review of Law and Economics, Elsevier, vol. 18(1), pages 1-11, March.
- Tracy R. Lewis & David E. M. Sappington, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment," American Economic Review, American Economic Association, vol. 91(3), pages 724-730, June.
- Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
- Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
- Ruben G. Echeverría & Nayra Bello O'Shanahan & Alain de Janvry & Karen Macours & Elisabeth Sadoulet & Pedro Juan del Rosario & Horacio Sánchez, 2002. "El acceso a la tierra en la agenda de desarrollo rural," IDB Publications 55218, Inter-American Development Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).
If references are entirely missing, you can add them using this form.