On the existence of the optimal fine for environmental crime
Classical theory states that the optimal fine equals the damage caused by the crime divided by the probability of detection. But does such an optimal fine exist? We focus on emissions from production, and, even if we assume that the damage function is perfectly known, we still show that the optimal fine typically does not exist. Non-existence occurs as the environmental damage function is non-linear in overall emissions, meaning that there are interactions between emissions, the economy and the environment. We argue that these interactions cannot be accurately reflected in the fine imposed by the regulator. Previous literature on optimal fines does not recognize the non-existence of the applicable optimal fine, basically since this literature uses discrete models where the damage caused by the crime is assumed constant. Our result reduces the attractiveness of fines and might thus help explain enforcement agencies' inclination towards non-monetary enforcement instruments.
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