Fees in an Imperfect World: An Application to Motor Vehicle Emissions

This paper compares an emissions fee on measured vehicle emissions rates to a mandatory regulation that requires all vehicles to maintain emissions below a minimum standard. We model the motorist’s decision under the fee policy and simulate the fee and regulatory policies using data from an emissions inspection program that includes test and repair information for more than 50,000 vehicles. Under ideal conditions with perfect information and no subsidies, the fee on emissions rates performs substantially better than the regulatory policy. When more realistic modeling of available information and market conditions are included, there is little difference in the cost and effectiveness of the fee and regulatory programs. In particular, we find that the ability of the polluter to assess the emissions and cost outcomes of is critical importance for the performance of the fee policy.