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Getting Polluters to Tell the Truth

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  • Marcelo Caffera
  • Juan Dubra

Abstract

We study the problem of a regulator who must control the emissions of a given pollutant from a series of industries when the firmsíabatement costs are unknown. We develop a mechanism in which the regulator asks firms to report their abatement costs and implements the most stringent emissions standard consistent with the firmsí declarations. He also inspects one of the Örms in each industry which declared the cost structure consistent with the least stringent emissions standard and with an arbitrarily small probability, he discovers whether the report was true or not. The firm is punished with an arbitrarily small fine if and only if its report was false. This mechanism is simple, is implementable in practice, its unique equilibrium is truth telling by firms, it implements the first best pollution standards and shares some features of the regulatory processes actually observed in reality.

Suggested Citation

  • Marcelo Caffera & Juan Dubra, 2016. "Getting Polluters to Tell the Truth," Documentos de Trabajo/Working Papers 1606, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    • Handle: RePEc:mnt:wpaper:1606
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Caffera, Marcelo & Dubra, Juan & Figueroa, Nicolás, 2018. "Mechanism design when players’ preferences and information coincide," Mathematical Social Sciences, Elsevier, vol. 91(C), pages 56-61.

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    More about this item

    Keywords

    Efficient Emissions Standards; Command and Control; Truth Telling; Full Nash Implementation.;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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