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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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  1. Carlos Chavez & John K. Stranlund, 2000. "Enforcing Transferable Permit Systems in the Presence of Market Power," Working Papers 04-2000, Departamento de Economía, Universidad de Concepción.
  2. John Stranlund, 2007. "The regulatory choice of noncompliance in emissions trading programs," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(1), pages 99-117, September.
  3. Malik, Arun S, 1992. "Enforcement Costs and the Choice of Policy Instruments for Controlling Pollution," Economic Inquiry, Western Economic Association International, vol. 30(4), pages 714-21, October.
  4. Laurent Franckx, 1998. "The use of ambient inspections in environmental monitoring and enforcement when the inspection agency cannot commit itself to announced inspection probabilities," Center for Economic Studies - Discussion papers ces9835, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  5. Boemare, Catherine & Quirion, Philippe, 2002. "Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences," Ecological Economics, Elsevier, vol. 43(2-3), pages 213-230, December.
  6. Ines Macho-Stadler & David Pérez-Castrillo, 2004. "Optimal Enforcement Policy and Firms’ Emissions and Compliance with Environmental Taxes," CESifo Working Paper Series 1193, CESifo Group Munich.
  7. A. Mitchell Polinsky & Steven Shavell, 1990. "Enforcement Costs and the Optimal Magnitude and Probability of Fines," NBER Working Papers 3429, National Bureau of Economic Research, Inc.
  8. P. Bontems & J-M. Bourgeon, 2000. "Optimal Environmental Taxation and Enforcement Policy," THEMA Working Papers 2000-56, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  9. Harford, Jon D., 1978. "Firm behavior under imperfectly enforceable pollution standards and taxes," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 26-43, March.
  10. Garvie, Devon & Keeler, Andrew, 1994. "Incomplete enforcement with endogenous regulatory choice," Journal of Public Economics, Elsevier, vol. 55(1), pages 141-162, September.
  11. 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.
  12. Harford, Jon D., 1987. "Self-reporting of pollution and the firm's behavior under imperfectly enforceable regulations," Journal of Environmental Economics and Management, Elsevier, vol. 14(3), pages 293-303, September.
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  14. Keeler, Andrew G., 1991. "Noncompliant firms in transferable discharge permit markets: Some extensions," Journal of Environmental Economics and Management, Elsevier, vol. 21(2), pages 180-189, September.
  15. Malik, Arun S., 1990. "Markets for pollution control when firms are noncompliant," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 97-106, March.
  16. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
  17. van Egteren, Henry & Weber, Marian, 1996. "Marketable Permits, Market Power, and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 161-173, March.
  18. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
  19. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  20. Tracy R. Lewis, 1996. "Protecting the Environment When Costs and Benefits Are Privately Known," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 819-847, Winter.
  21. 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.
  22. Cremer, Helmuth & Gahvari, Firouz, 2002. "Imperfect observability of emissions and second-best emission and output taxes," Journal of Public Economics, Elsevier, vol. 85(3), pages 385-407, September.
  23. Grieson, Ronald E. & Singh, Nirvikar, 1990. "Regulating externalities through testing," Journal of Public Economics, Elsevier, vol. 41(3), pages 369-387, April.
  24. 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.
  25. Malik Arun S., 1993. "Self-Reporting and the Design of Policies for Regulating Stochastic Pollution," Journal of Environmental Economics and Management, Elsevier, vol. 24(3), pages 241-257, May.
  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. Carmen Arguedas, 2008. "To Comply or Not To Comply? Pollution Standard Setting Under Costly Monitoring and Sanctioning," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 41(2), pages 155-168, October.
  28. Agnar Sandmo, 2002. "Efficient Environmental Policy with Imperfect Compliance," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 23(1), pages 85-103, September.
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