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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Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number
0060.
Find related papers by JEL classification: K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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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.