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Adverse Selection, Emission Permits and Optimal Price Differentiation

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  • Mourad Afif
  • Sandrine Spaeter
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    Abstract

    In this paper, we focus on the adverse selection issue that prevails in an economy when the regulator is not able to observe the type of the abate- ment costs of the firms. The regulator decides the total level of emission that minimizes the total social cost and he sells them to the firms at some di¤erentiated prices. When firms can hide their type relative to their true abatement costs, prices must not only minimize the social cost of the envir- onmental policy. They must also induce the firms to reveal their true type. A striking point of our model is that there is no participation constraint for firms are compelled to be actors of the environmental policy. Another original result concerns the rent, which still benefits to low-cost types, but which appears to be a fee paid by high-cost types.

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    Bibliographic Info

    Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2010-07.

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    Date of creation: 2010
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    Handle: RePEc:ulp:sbbeta:2010-07

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    Keywords: Regulation; adverse selection; emission permits; abatement costs; price differentiation.;

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    1. Shah, Sudhir A., 2005. "Optimal management of durable pollution," Journal of Economic Dynamics and Control, Elsevier, vol. 29(6), pages 1121-1164, June.
    2. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Adverse Selection and Renegotiation in Procurement," Review of Economic Studies, Wiley Blackwell, vol. 57(4), pages 597-625, October.
    3. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
    4. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    5. Michel Mougeot & Sonia Schwartz, 2008. "Allocation optimale de quotas de pollution et information asymétrique," Revue économique, Presses de Sciences-Po, vol. 59(3), pages 505-515.
    6. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
    7. Bulckaen, Fabrizio, 1997. "Emissions Charge and Asymmetric Information: Consistently a Problem?," Journal of Environmental Economics and Management, Elsevier, vol. 34(1), pages 100-106, September.
    8. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
    9. Stewart, Jay, 1994. "The Welfare Implications of Moral Hazard and Adverse Selection in Competitive Insurance Markets," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 193-208, April.
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