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To Comply or Not To Comply? Pollution Standard Setting Under Costly Monitoring and Sanctioning

  • Carmen Arguedas

    ()

In this paper, we characterize optimal regulatory policies composed of pollution standards, probabilities of inspection and fines for non-compliance, in a context where both monitoring and sanctioning are socially costly, and penalties may include gravity and non-gravity components at the regulator's discretion. The optimal policy entails compliance with the standards as long as a quite intuitive condition is met. Non-compliant policies may include standards even below the pollution levels that minimize the sum of abatement costs and external damages. Interestingly, the appropriate structure of penalties under non-compliance is highly progressive, while the best possible shape of the fines under compliance is linear only if non-gravity sanctions are not allowed.

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File URL: http://hdl.handle.net/10.1007/s10640-007-9185-5
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Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 41 (2008)
Issue (Month): 2 (October)
Pages: 155-168

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Handle: RePEc:kap:enreec:v:41:y:2008:i:2:p:155-168
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