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Environmental Protection Agencies: Measuring the Welfare Benefits from Regulation under Different Information Contexts

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Author Info

  • Ana Espinola-Arredondo
  • Felix Munoz-Garcia

    ()
    (School of Economic Sciences, Washington State University)

Abstract

This paper evaluates the welfare benefits of introducing environmental regulation in a market that is subject to the threat of entry. We consider complete and incomplete information settings, where potential entrants use the regulator’s tax policy and the incumbent’s output decisions in order to infer the incumbent’s cost structure. When the regulator is absent, we show that firms? entry-deterring practices increase pollution relative to complete information. Hence, under certain conditions, environmental regulation becomes more beneficial in incomplete than in complete information contexts. Our results, therefore, identify under which cases an under-or over-estimation of the welfare benefits of environmental regulation arises from ignoring the information setting in which firms interact. We also examine how this estimation error increases as firms become more symmetric in their production costs.

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File URL: http://faculty.ses.wsu.edu/WorkingPapers/AnaEspinola/WP2011-12.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by School of Economic Sciences, Washington State University in its series Working Papers with number 2011-11.

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Length: 36 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:wsu:wpaper:espinola-11

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Related research

Keywords: Entry deterrence; Signaling; Emission fees; Welfare Benefits;

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  1. F. Barigozzi & B. Villeneuve, 2004. "The signaling effect of tax policy," Working Papers 500, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
  3. David B. Ridley, 2008. "Herding versus Hotelling: Market Entry with Costly Information," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(3), pages 607-631, 09.
  4. Ana Espinola-Arredondo & Felix Munoz-Garcia & Jude Bayham, 2011. "Promoting Lies through Regulation: Deterrence Impacts of Flexible versus Inflexible Policy," Working Papers 2011-3, School of Economic Sciences, Washington State University.
  5. Farrell, Joseph, 1987. "Information and the Coase Theorem," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 113-29, Fall.
  6. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
  7. Xepapadeas, A. P., 1991. "Environmental policy under imperfect information: Incentives and moral hazard," Journal of Environmental Economics and Management, Elsevier, vol. 20(2), pages 113-126, March.
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