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The Optimal Pricing of Pollution When Enforcement is Costly

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Author Info

  • John K. Stranlund

    ()
    (Department of Resource Economics, University of Massachusetts Amherst)

  • Carlos A. Chavez

    ()
    (Departmento de Economia, Universidad de Concepcion, Chili)

  • Mauricio G. Villena

    ()
    (School of Business, Universidad Adolfo Ibanez, Santiago, Chili)

Abstract

We consider the pricing of a uniformly mixed pollutant when enforcement is costly with a model of optimal, possibly firm-specific, emissions taxes and their enforcement. We argue that optimality requires an enforcement strategy that induces full compliance by every firm. This holds whether or not regulators have complete information about firms’ abatement costs, the costs of monitoring them for compliance, or the costs of collecting penalties from noncompliant firms. Moreover, ignoring several unrealistic special cases, optimality requires discriminatory emissions taxes except when regulators are unable to observe firms’ abatement costs, the costs of monitoring individual firms, or any firm-specific characteristic that is known to be jointly distributed with either the firms’ abatement costs or their monitoring costs. In many pollution control settings, especially those that have been subject to various forms of environmental regulation in the past, regulators are not likely to be so ill-informed about individual firms. In these settings, policies that set or generate a uniform pollution price like conventional designs involving uniform taxes and competitive emission trading with freely-allocated or auctioned permits will not be efficient.

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Bibliographic Info

Paper provided by University of Massachusetts Amherst, Department of Resource Economics in its series Working Papers with number 2007-6.

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Length: 29 pages
Date of creation: Apr 2007
Date of revision:
Handle: RePEc:dre:wpaper:2007-6

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Web page: http://www.umass.edu/resec/
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Related research

Keywords: Compliance; Enforcement; Emissions Taxes; Monitoring; Asymmetric Information; Uncertainty;

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References

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  1. Polinsky, A Mitchell & Shavell, Steven, 1992. "Enforcement Costs and the Optimal Magnitude and Probability of Fines," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 133-48, April.
  2. John Stranlund, 2007. "The regulatory choice of noncompliance in emissions trading programs," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(1), pages 99-117, September.
  3. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
  4. Ines Macho-Stadler & David Pérez-Castrillo, 2004. "Optimal Enforcement Policy and Firms’ Emissions and Compliance with Environmental Taxes," CESifo Working Paper Series 1193, CESifo Group Munich.
  5. Cremer, Helmuth & Gahvari, Firouz, 2002. "Imperfect observability of emissions and second-best emission and output taxes," Journal of Public Economics, Elsevier, vol. 85(3), pages 385-407, September.
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  7. Laurent Franckx, 1998. "The use of ambient inspections in environmental monitoring and enforcement when the inspection agency cannot commit itself to announced inspection probabilities," Center for Economic Studies - Discussion papers ces9835, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
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  9. 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.
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  24. Devon Garvie & Andrew Keeler, 1993. "Incomplete Enforcement with Endogenous Regulatory Choice," Working Papers 873, Queen's University, Department of Economics.
  25. Stranlund, John K & Chavez, Carlos A, 2000. "Effective Enforcement of a Transferable Emissions Permit System with a Self-Reporting Requirement," Journal of Regulatory Economics, Springer, vol. 18(2), pages 113-31, September.
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Citations

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Cited by:
  1. David McEvoy & John Stranlund, 2010. "Costly Enforcement of Voluntary Environmental Agreements," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 47(1), pages 45-63, September.
  2. Carlos A. Chavez & John K. Stranlund, 2008. "A Note on Emissions Taxes and Incomplete Information," Working Papers 2008-5, University of Massachusetts Amherst, Department of Resource Economics.
  3. John K. Stranlund & Carlos A. Chavez, 2011. "Who Should Bear the Administrative Costs of an Emissions Tax?," Working Papers 2011-3, University of Massachusetts Amherst, Department of Resource Economics.
  4. David M. McEvoy & John K. Stranlund, 2007. "Costly Enforcement of Voluntary Environmental Agreements with Industries," Working Papers 2007-11, University of Massachusetts Amherst, Department of Resource Economics.
  5. 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.
  6. Villegas, Clara & Coria, Jessica, 2009. "Taxes, Permits and the Adoption of Abatement Technology under Imperfect Compliance," Working Papers in Economics 368, University of Gothenburg, Department of Economics.
  7. 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.
  8. John K. Stranlund, 2010. "Should We Impose Emissions Taxes That Firms Evade?," Working Papers 2010-4, University of Massachusetts Amherst, Department of Resource Economics.
  9. Marcelo Caffera & Carlos Chávez, 2011. "The Cost-Effective Choice of Policy Instruments to Cap Aggregate Emissions with Costly Enforcement," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 50(4), pages 531-557, December.
  10. Stranlund, John K. & Moffitt, L. Joe, 2014. "Enforcement and price controls in emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 67(1), pages 20-38.

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