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The Regulation of Nonpoint Emissions in the Laboratory: A Stress Test of the Ambient Tax Mechanism

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Author Info
Francois Cochard
Anthony Ziegelmeyer ()
Kene Boun My

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Abstract

We investigate the ability of the damage based tax mechanism to induce socially optimal outcomes in a controlled laboratory environment which incorporates important aspects of nonpoint pollution problems. Our experimental setting combines a strictly convex damage function with uncertainty in measuring the ambient level of pollution, indefinitely repeated interactions among heterogeneous polluters, limited information on the regulator's side about the polluters' profit functions, and, in half of the experimental conditions, limited information on the polluters' side about the strategic environment. We additionally investigate whether the relative position of the social optimum in the polluters’ emission space has an impact on the efficiency of the fiscal instrument. In almost all implemented conditions, the observed total pollution level is not significantly different from the socially optimal level but compliance at the individual level is rarely observed. Experimental conditions in which polluters have to dramatically reduce their emissions in order to comply with the fiscal instrument lead to higher efficiency levels than those where compliance implies less dramatic reductions. Our most striking result is that less information on the polluters' side is beneficial from a social point of view as the performance of the damage based tax mechanism is higher the less information polluters have about the strategic environment.

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Paper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Discussion Papers on Strategic Interaction with number 2005-37.

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Length: 26 pages
Date of creation: Dec 2005
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Handle: RePEc:esi:discus:2005-37

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  1. Lars Hansen, 1998. "A Damage Based Tax Mechanism for Regulation of Non-Point Emissions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 12(1), pages 99-112, July. [Downloadable!] (restricted)
  2. Horan, Richard D. & Shortle, James S. & Abler, David G., 1998. "Ambient Taxes When Polluters Have Multiple Choices," Journal of Environmental Economics and Management, Elsevier, vol. 36(2), pages 186-199, September. [Downloadable!] (restricted)
  3. Spraggon, John, 2002. "Exogenous targeting instruments as a solution to group moral hazards," Journal of Public Economics, Elsevier, vol. 84(3), pages 427-456, June. [Downloadable!] (restricted)
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  4. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January. [Downloadable!] (restricted)
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  5. Aumann, Robert & Brandenburger, Adam, 1995. "Epistemic Conditions for Nash Equilibrium," Econometrica, Econometric Society, vol. 63(5), pages 1161-80, September. [Downloadable!] (restricted)
  6. Francisco Alpízar & Till Requate & Albert Schram, 2004. "Collective versus Random Fining: An Experimental Study on Controlling Ambient Pollution," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(2), pages 231-252, October. [Downloadable!] (restricted)
  7. Abraham Neyman, 1999. "Cooperation in Repeated Games when the Number of Stages is Not Commonly Known," Econometrica, Econometric Society, vol. 67(1), pages 45-64, January.
  8. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March. [Downloadable!] (restricted)
  9. Cason, Timothy N. & Gangadharan, Lata & Duke, Charlotte, 2003. "A laboratory study of auctions for reducing non-point source pollution," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 446-471, November. [Downloadable!] (restricted)
  10. Rassenti, Stephen & Reynolds, Stanley S. & Smith, Vernon L. & Szidarovszky, Ferenc, 2000. "Adaptation and convergence of behavior in repeated experimental Cournot games," Journal of Economic Behavior & Organization, Elsevier, vol. 41(2), pages 117-146, February. [Downloadable!] (restricted)
  11. Marks, Melanie B & Croson, Rachel T A, 1999. " The Effect of Incomplete Information in a Threshold Public Goods Experiment," Public Choice, Springer, vol. 99(1-2), pages 103-18, April. [Downloadable!] (restricted)
  12. Timothy N. Cason & Lata Gangadharan, 2004. "Auction Design for Voluntary Conservation Programs," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 86(5), pages 1211-1217, December. [Downloadable!] (restricted)
  13. François Cochard & Marc Willinger & Anastasios Xepapadeas, 2005. "Efficiency of Nonpoint Source Pollution Instruments: An Experimental Study," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 30(4), pages 393-422, 04. [Downloadable!] (restricted)
  14. Brown-Kruse, Jamie, et al, 1994. "Bertrand-Edgeworth Competition in Experimental Markets," Econometrica, Econometric Society, vol. 62(2), pages 343-72, March. [Downloadable!] (restricted)
  15. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 394, UCLA Department of Economics. [Downloadable!]
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  16. Spraggon, John, 2004. "Testing ambient pollution instruments with heterogeneous agents," Journal of Environmental Economics and Management, Elsevier, vol. 48(2), pages 837-856, September. [Downloadable!] (restricted)
  17. Charles F. Mason & Owen R. Phillips, 1997. "Information And Cost Asymmetry In Experimental Duopoly Markets," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 290-299, May. [Downloadable!] (restricted)
  18. Bernheim, B Douglas, 1984. "Rationalizable Strategic Behavior," Econometrica, Econometric Society, vol. 52(4), pages 1007-28, July. [Downloadable!] (restricted)
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