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Optimal Monitoring to Implement Clean Technologies when Pollution is Random

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Author Info

  • Ines Macho-Stadler

    (Universitat Autonoma de Barcelona)

  • David Perez-Castrillo

    ()
    (Universitat Autonoma de Barcelona)

Abstract

We analyze environments where firms chose a production technology which, together with random events, determines the final emission level. We consider the coexistence of two alternative technologies. The cost of the adoption of the clean technology and the actual emissions are firms' private information. The environmental regulation is based on taxes over reported emissions, and on monitoring and penalties over unreported emissions. We show that the optimal monitoring is a cut-off policy, where all reports below a threshold are inspected with the same probability, while reports above the threshold are not monitored. We show that if the adoption of the technology is firms' private information, too few firms will adopt the clean technology under the optimal monitoring policy. However, when the EA can check the technology adopted by the firms, the optimal policy may induce overswitching or underswitching to the clean technology.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0060.

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Length: 34 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:pad:wpaper:0060

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Keywords: Production technology; random emissions; environmental taxes; optimal monitoring policy.;

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References

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  1. Tarui, Nori & Polasky, Stephen, 2005. "Environmental regulation with technology adoption, learning and strategic behavior," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 447-467, November.
  2. McKenna, C.J. & Livernois, J., 1996. "Truth or Consequences? Enforcing Pollution Standards," Working Papers 1996-7, University of Guelph, Department of Economics and Finance.
  3. 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.
  4. Inés Macho-Stadler, 2008. "Environmental regulation: choice of instruments under imperfect compliance," Spanish Economic Review, Springer, vol. 10(1), pages 1-21, March.
  5. 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.
  6. 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.
  7. Hans Gersbach & Till Requate, 2000. "Emission Taxes and the Design of Refunding Schemes," CESifo Working Paper Series 325, CESifo Group Munich.
  8. Macho-Stadler, Ines & Perez-Castrillo, J David, 1997. "Optimal Auditing with Heterogeneous Income," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 951-68, November.
  9. 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.
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  13. Bontems, Philippe & Bourgeon, Jean-Marc, 2005. "Optimal environmental taxation and enforcement policy," European Economic Review, Elsevier, vol. 49(2), pages 409-435, February.
  14. Sanchez, Isabel & Sobel, Joel, 1993. "Hierarchical design and enforcement of income tax policies," Journal of Public Economics, Elsevier, vol. 50(3), pages 345-369, March.
  15. Gersbach, Hans & Requate, Till, 2004. "Emission taxes and optimal refunding schemes," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 713-725, March.
  16. 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.
  17. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
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Citations

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Cited by:
  1. J. Atsu Amegashie & Bazoumana Ouattara & Eric Strobl, 2007. "Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid," Working Papers 0702, University of Guelph, Department of Economics and Finance.
  2. Renan-Ulrich Goetz & Yolanda Martínez, 2013. "Nonpoint source pollution and two-part instruments," Environmental Economics and Policy Studies, Society for Environmental Economics and Policy Studies - SEEPS, vol. 15(3), pages 237-258, July.

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