In this paper, we characterize optimal regulatory policies composed of pollution standards, probabilities of inspection and fines for non-compliance, in a context where both monitoring and sanctioning are socially costly, and penalties may include gravity and non-gravity components at the regulator's discretion. The optimal policy entails compliance with the standards as long as a quite intuitive condition is met. Non-compliant policies may include standards even below the pollution levels that minimize the sum of abatement costs and external damages. Interestingly, the appropriate structure of penalties under non-compliance is highly progressive, while the best possible shape of the fines under compliance is linear only if non-gravity sanctions are not allowed.
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Paper provided by Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History) in its series Working Papers in Economic Theory with number
2007/13.
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 L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
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