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The optimal pricing of pollution when enforcement is costly

  • Stranlund, John K.
  • Chávez, Carlos A.
  • Villena, Mauricio G.

We consider the pricing of a uniformly mixed pollutant with a model of optimal, possibly firm-specific, emissions taxes and their enforcement under incomplete information about firms' abatement costs, enforcement costs, and pollution damage. We argue that optimality requires an enforcement strategy that induces full compliance by every firm, except possibly when a regulator can base the probabilities of detecting individual violations on observable correlates of violators' actual emissions. Moreover, optimality requires discriminatory taxes, except when a regulator is unable to use observable firm-level characteristics to gain some information about the variation in firms' abatement costs or monitoring costs.

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Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 58 (2009)
Issue (Month): 2 (September)
Pages: 183-191

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Handle: RePEc:eee:jeeman:v:58:y:2009:i:2:p:183-191
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622870

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  12. Bebchuk, Lucian Arye & Kaplow, Louis, 1993. "Optimal sanctions and differences in individuals' likelihood of avoiding detection," International Review of Law and Economics, Elsevier, vol. 13(2), pages 217-224, June.
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  18. Anthony Heyes, 1994. "Environmental enforcement when ‘inspectability’ is endogenous: A model with overshooting properties," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 4(5), pages 479-494, October.
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  26. Stranlund, John K & Chavez, Carlos A, 2000. "Effective Enforcement of a Transferable Emissions Permit System with a Self-Reporting Requirement," Journal of Regulatory Economics, Springer, vol. 18(2), pages 113-31, September.
  27. Stranlund, John K. & Dhanda, Kanwalroop Kathy, 1999. "Endogenous Monitoring and Enforcement of a Transferable Emissions Permit System," Journal of Environmental Economics and Management, Elsevier, vol. 38(3), pages 267-282, November.
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