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Verifiable and Non-Verifiable Anonymous Mechanisms for Regulating a Polluting Monopolist

  • James E. Prieger

    ()

    (School of Public Policy, Pepperdine University)

  • Nicholas J. Sanders

    ()

    (Stanford Institute for Economic Policy Research, Stanford University)

Optimal regulation of a polluting natural monopolist must correct for both external damages and market power to achieve a social optimum. Existing non-Bayesian regulatory methods require knowledge of the demand function, while Bayesian schemes require knowledge of the underlying cost distribution. We introduce mechanisms adapted to use less information. Our Price-based Subsidy (PS) mechanisms give the firm a transfer that matches or approximates the incremental surplus generated each period. The regulator need not observe the abatement activity or know the demand, cost, or damage functions of the firm. All of the mechanisms induce the firm to price at marginal social cost, either immediately or asymptotically.

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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 10-034.

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Date of creation: Aug 2011
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Handle: RePEc:sip:dpaper:10-034
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