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The relative efficiency of environmental policy instruments in a second-best setting with costly monitoring and enforcement


  • Sandra Rousseau

    () (K.U.Leuven, C.E.S., Energy, Transport and Environment)

  • Stef Proost

    () (K.U.Leuven, C.E.S., Energy, Transport and Environment)


In this paper we incorporate monitoring and enforcement aspects in the choice of environmental policy instruments in a general equilibrium framework. Goulder et al. (J.Pub.Econ., 1999) look into the choice of policy instruments in the presence of distortionary taxes. We extend this model by no longer assuming full compliance from firms. A violating firm is caught with a certain probability by the inspection agency. Once a violator is detected, he always has to pay a fine. With a positive, finite expected fine and a probability of detection smaller than unity, there will always be a certain proportion of noncompliance in the economy. We calculate the gross efficiency costs of different policy instruments (emission tax, output tax, tradable permits and technology mandate). We illustrate the model for different price instruments (emission tax, output tax and tradable permits). We find that the relative inefficiency of grandfathered tradable permits vis- à-vis emission taxes found in a second-best setting with perfect compliance, is strongly decreased with imperfect compliance.

Suggested Citation

  • Sandra Rousseau & Stef Proost, 2001. "The relative efficiency of environmental policy instruments in a second-best setting with costly monitoring and enforcement," Energy, Transport and Environment Working Papers Series ete0101, KU Leuven, Department of Economics - Research Group Energy, Transport and Environment.
  • Handle: RePEc:ete:etewps:ete0101

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