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The optimal pricing of pollution when enforcement is costly

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

Abstract

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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  • Stranlund, John K. & Chávez, Carlos A. & Villena, Mauricio G., 2009. "The optimal pricing of pollution when enforcement is costly," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 183-191, September.
    • Handle: RePEc:eee:jeeman:v:58:y:2009:i:2:p:183-191
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    Cited by:

    1. Carlos Chávez & John Stranlund, 2009. "A Note on Emissions Taxes and Incomplete Information," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 44(1), pages 137-144, September.
    2. John K. Stranlund, 2010. "Should We Impose Emissions Taxes That Firms Evade?," Working Papers 2010-4, University of Massachusetts Amherst, Department of Resource Economics.
    3. McEvoy, David M. & Stranlund, John K., 2007. "Costly Enforcement of Voluntary Environmental Agreements with Industries," Working Paper Series 7382, University of Massachusetts, Amherst, Department of Resource Economics.
    4. Villegas, Clara & Coria, Jessica, 2009. "Taxes, Permits, and the Adoptation of Abatement Technology under Imperfect Compliance," RFF Working Paper Series dp-09-20-efd, Resources for the Future.
    5. John Stranlund & Carlos Chávez, 2013. "Who should bear the administrative costs of an emissions tax?," Journal of Regulatory Economics, Springer, vol. 44(1), pages 53-79, August.
    6. Mauricio G. Villena & María José Quinteros, 2024. "Corporate Social Responsibility, Environmental Emissions and Time-Consistent Taxation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(1), pages 219-255, January.
    7. Stranlund, John K. & Moffitt, L. Joe, 2014. "Enforcement and price controls in emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 67(1), pages 20-38.
    8. Marcelo Caffera & Carlos Chávez, 2011. "The Cost-Effective Choice of Policy Instruments to Cap Aggregate Emissions with Costly Enforcement," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 50(4), pages 531-557, December.
    9. De Cara, Stéphane & Henry, Loïc & Jayet, Pierre-Alain, 2018. "Optimal coverage of an emission tax in the presence of monitoring, reporting, and verification costs," Journal of Environmental Economics and Management, Elsevier, vol. 89(C), pages 71-93.
    10. Woerman, Matt, 2023. "Linking carbon markets with different initial conditions," Journal of Environmental Economics and Management, Elsevier, vol. 119(C).
    11. Clara Villegas-Palacio & Jessica Coria, 2010. "On the interaction between imperfect compliance and technology adoption: taxes versus tradable emissions permits," Journal of Regulatory Economics, Springer, vol. 38(3), pages 274-291, December.
    12. Joschka Gerigk & Ian MacKenzie & Markus Ohndorf, 2015. "A Model of Benchmarking Regulation: Revisiting the Efficiency of Environmental Standards," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(1), pages 59-82, September.
    13. Min Chen & Konstantinos Serfes, 2012. "Minimum quality standard regulation under imperfect quality observability," Journal of Regulatory Economics, Springer, vol. 41(2), pages 269-291, April.
    14. Oestreich, Andreas Marcel, 2017. "On optimal audit mechanisms for environmental taxes," Journal of Environmental Economics and Management, Elsevier, vol. 84(C), pages 62-83.
    15. Hugo Salgado & Carlos Chávez, 2016. "Using Taxes to Deter Illegal Fishing in ITQ Systems," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 64(4), pages 709-724, August.
    16. Li Xiangfei & Qin Qin & Gao Yang, 2017. "Optimal Implementation Strategy of Carbon Emission Reduction Policy Instruments in Consideration of Cost Efficiency," Journal of Systems Science and Information, De Gruyter, vol. 5(2), pages 111-127, April.
    17. Rupayan Pal & Preksha Jain & Prasenjit Banerjee, 2022. "The Environment and corruption: Monetary vs. Non-monetary Incentives and the first best," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2022-011, Indira Gandhi Institute of Development Research, Mumbai, India.
    18. Pauli Lappi, 2017. "Emissions trading, non-compliance and bankable permits," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 1081-1099, December.
    19. Jessica Coria & Clara Villegas-Palacio, 2014. "Regulatory Dealing: Technology Adoption Versus Enforcement Stringency Of Emission Taxes," Contemporary Economic Policy, Western Economic Association International, vol. 32(2), pages 451-473, April.
    20. David McEvoy & John Stranlund, 2010. "Costly Enforcement of Voluntary Environmental Agreements," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(1), pages 45-63, September.

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    More about this item

    Keywords

    Compliance Enforcement Emissions taxes Monitoring Asymmetric information Uncertainty;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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