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Environmental Regulation: Choice of Instruments under Imperfect Compliance

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  • Inés Macho-Stadler

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Abstract

Compliance is an important issue in environmental regulation. In this paper, we discuss some of the key elements of the problem and analyze a situation where emissions are not random and firms are risk-neutral. We study the firm's decision on emissions and compliance when the environmental regulation is based on standards and the enforcement agency audits the firm with a certain probability. We then compare total emissions when environmental regulation is based on different instruments: standards, taxes, and tradable permits. We show that when compliance is an issue, environmental taxes are superior to the other instruments. We also analyze the (static) efficiency of the solution.

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Bibliographic Info

Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 673.06.

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Length: 25
Date of creation: 20 Nov 2006
Date of revision:
Handle: RePEc:aub:autbar:673.06

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Keywords: environmental regulation; audits and compliance; environmental standards; other instruments.;

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References

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  1. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
  2. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
  3. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  4. Kaplow, Louis & Shavell, Steven, 1994. "Optimal Law Enforcement with Self-Reporting of Behavior," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 583-606, June.
  5. Harford, Jon D., 1987. "Self-reporting of pollution and the firm's behavior under imperfectly enforceable regulations," Journal of Environmental Economics and Management, Elsevier, vol. 14(3), pages 293-303, September.
  6. Franckx, Laurent, 2002. "The Use of Ambient Inspections in Environmental Monitoring and Enforcement When the Inspection Agency Cannot Commit Itself to Announced Inspection Probabilities," Journal of Environmental Economics and Management, Elsevier, vol. 43(1), pages 71-92, January.
  7. Foulon, Jerome & Lanoie, Paul & Laplante, Benoit, 2002. "Incentives for Pollution Control: Regulation or Information?," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 169-187, July.
  8. Heyes, Anthony, 2000. "Implementing Environmental Regulation: Enforcement and Compliance," Journal of Regulatory Economics, Springer, vol. 17(2), pages 107-29, March.
  9. Devon Garvie & Andrew Keeler, 1993. "Incomplete Enforcement with Endogenous Regulatory Choice," Working Papers 873, Queen's University, Department of Economics.
  10. Agnar Sandmo, 2002. "Efficient Environmental Policy with Imperfect Compliance," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 23(1), pages 85-103, September.
  11. Stranlund, John K. & Dhanda, Kanwalroop Kathy, 1999. "Endogenous Monitoring and Enforcement of a Transferable Emissions Permit System," Journal of Environmental Economics and Management, Elsevier, vol. 38(3), pages 267-282, November.
  12. Innes, Robert, 1999. "Remediation and self-reporting in optimal law enforcement," Journal of Public Economics, Elsevier, vol. 72(3), pages 379-393, June.
  13. Malik, Arun S., 1990. "Markets for pollution control when firms are noncompliant," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 97-106, March.
  14. Inés Macho-Stadler & David Pérez-Castrillo, 2004. "Optimal Enforcement Policy and Firm's Emissions and Compliance with Environmental Taxes," Working Papers 124, Barcelona Graduate School of Economics.
  15. Dasgupta, Susmita & Laplante, Benoit & Mamingi, Nlandu & Wang, Hua, 2001. "Inspections, pollution prices, and environmental performance: evidence from China," Ecological Economics, Elsevier, vol. 36(3), pages 487-498, March.
  16. Keeler, Andrew G., 1991. "Noncompliant firms in transferable discharge permit markets: Some extensions," Journal of Environmental Economics and Management, Elsevier, vol. 21(2), pages 180-189, September.
  17. Malik Arun S., 1993. "Self-Reporting and the Design of Policies for Regulating Stochastic Pollution," Journal of Environmental Economics and Management, Elsevier, vol. 24(3), pages 241-257, May.
  18. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
  19. Harford, Jon D., 1978. "Firm behavior under imperfectly enforceable pollution standards and taxes," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 26-43, March.
  20. Livernois, John & McKenna, C. J., 1999. "Truth or consequences: Enforcing pollution standards with self-reporting," Journal of Public Economics, Elsevier, vol. 71(3), pages 415-440, March.
  21. McKenna, C.J. & Livernois, J., 1996. "Truth or Consequences? Enforcing Pollution Standards," Working Papers 1996-7, University of Guelph, Department of Economics and Finance.
  22. Anthony Heyes, 1994. "Environmental enforcement when ‘inspectability’ is endogenous: A model with overshooting properties," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 4(5), pages 479-494, October.
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Citations

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Cited by:
  1. Markus Ohndorf, 2010. "Optimal Monitoring for project-based Emissions Trading Systems under incomplete Enforcement," IED Working paper 10-13, IED Institute for Environmental Decisions, ETH Zurich.
  2. Ian MacKenzie & Markus Ohndorf, 2012. "Optimal monitoring of credit-based emissions trading under asymmetric information," Journal of Regulatory Economics, Springer, vol. 42(2), pages 180-203, October.
  3. Inés Macho-Stadler & David Pérez-Castrillo, 2007. "Optimal monitoring to implement clean technologies when pollution is random," Working Papers 289, Barcelona Graduate School of Economics.
  4. Min Chen & Konstantinos Serfes, 2012. "Minimum quality standard regulation under imperfect quality observability," Journal of Regulatory Economics, Springer, vol. 41(2), pages 269-291, April.
  5. Rohling, Moritz & Ohndorf, Markus, 2012. "Prices vs. Quantities with fiscal cushioning," Resource and Energy Economics, Elsevier, vol. 34(2), pages 169-187.
  6. Cheng, Chu-Chuan & Lai, Yu-Bong, 2012. "Does a stricter enforcement policy protect the environment? A political economy perspective," Resource and Energy Economics, Elsevier, vol. 34(4), pages 431-441.
  7. Villegas, Clara & Coria, Jessica, 2009. "Taxes, Permits, and the Adoptation of Abatement Technology under Imperfect Compliance," Discussion Papers dp-09-20-efd, Resources For the Future.
  8. Gutierrez-Hita, Carlos & Martinez-Sanchez, Francisco, 2013. "Environmental Policy to Foster a Green Differentiated Energy Market," MPRA Paper 47263, University Library of Munich, Germany.
  9. Clara Villegas-Palacio & Jessica Coria, 2010. "On the interaction between imperfect compliance and technology adoption: taxes versus tradable emissions permits," Journal of Regulatory Economics, Springer, vol. 38(3), pages 274-291, December.

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