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Economic instruments for emission abatement under appreciable technological indivisibilities

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  • Nir Becker
  • Mira Baron
  • Mordechai Shechter

Abstract

The paper explores the performance of decentralized incentives when abatement involves technological indivisibilities. Technologically, pollution abatement is often carried out as a discrete process, if pollution reduction involves relatively large-scale investments in emission abatement equipment.Consequently, the firm's response to decentralized economic incentives for pollution abatement is affected by the indivisible property of the technology. It can be shown that in such cases efficiency may not be realized. Installing an abatement device may entail “too much” or “too little” investment compared with the eficient solution. To partially remedy this problem, an incentive scheme which incorporates a fine (penalty) on pollution-induced damages is proposed in this paper. Essentially, as in the case of the command and control approach, the mechanism imposes a fine when firms do not meet an aggregate (e.g., a “bubble”) emission level. The fine is set as a proportion of the polluting firm's share of the total excess damage inflicted when the standard has been violated. The paper explores alternative outcomes under this scheme in the framework of a non-cooperative game. The outcomes under command and control (uniform percentage reductions), taxes, pollution permits and the fine scheme are illustrated with data from the haifa area in northern Israel. They are compared with the social planner solution in terms of efficiency (achieving a given standard at minimum cost) and the volume of transfer cost. Copyright Kluwer Academic Publishers 1993

Suggested Citation

  • Nir Becker & Mira Baron & Mordechai Shechter, 1993. "Economic instruments for emission abatement under appreciable technological indivisibilities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 3(3), pages 263-284, June.
    • Handle: RePEc:kap:enreec:v:3:y:1993:i:3:p:263-284
    DOI: 10.1007/BF00313162
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    References listed on IDEAS

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    1. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    2. Mordechai Shechter, 1991. "A comparative study of environmental amenity valuations," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 1(2), pages 129-155, June.
    3. JÖrg Finsinger & Ingo Vogelsa, 1981. "Alternative Institutional Frameworks For Price Incentive Mechanisms," Kyklos, Wiley Blackwell, vol. 34(3), pages 388-404, August.
    4. Shibata, Hirofumi & Winrich, J Steven, 1983. "Control of Pollution when the Offended Defend Themselves," Economica, London School of Economics and Political Science, vol. 50(200), pages 425-437, November.
    5. Oates, Wallace E & Portney, Paul R & McGartland, Albert M, 1989. "The Net Benefits of Incentive-Based Regulation: A Case Study of Environmental Standard Setting," American Economic Review, American Economic Association, vol. 79(5), pages 1233-1242, December.
    6. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, January.
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    1. Becker, Nir & Shechter, Mordechai, 1996. "Decentralized economic incentives under technological indivisibilities: a cooperative game approach," Ecological Economics, Elsevier, vol. 17(1), pages 9-20, April.
    2. Arthur Caplan, 2008. "Incremental and Average Control Costs in a Model of Water Quality Trading with Discrete Abatement Units," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(3), pages 419-435, November.

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