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Optimal Monitoring to Implement Clean Technologies when Pollution is Random

  • Ines Macho-Stadler

    (Universitat Autonoma de Barcelona)

  • David Perez-Castrillo


    (Universitat Autonoma de Barcelona)

We analyze environments where firms chose a production technology which, together with random events, determines the final emission level. We consider the coexistence of two alternative technologies. The cost of the adoption of the clean technology and the actual emissions are firms' private information. The environmental regulation is based on taxes over reported emissions, and on monitoring and penalties over unreported emissions. We show that the optimal monitoring is a cut-off policy, where all reports below a threshold are inspected with the same probability, while reports above the threshold are not monitored. We show that if the adoption of the technology is firms' private information, too few firms will adopt the clean technology under the optimal monitoring policy. However, when the EA can check the technology adopted by the firms, the optimal policy may induce overswitching or underswitching to the clean technology.

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Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0060.

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Length: 34 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:pad:wpaper:0060
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