Regulating Multiple Polluters: Deterrence and Liability Allocation

Abstract

We consider the problem of regulating many polluting firms when their individual emissions are unobservable. The tension between the dual regulatory goals of pollution deterrence and funding remediation is examined under two different constraints: that penalty revenues be sufficient to fund remediation costs; and that transfers from firms to the regulater must be nonnegative. To isolate the pure effect of increasing the number of polluting firms, we compare an industry consisting of a single large firm with another in which many small firms in aggregate mimic the characteristics of the large firm. Contrary to previous findings, we show that both the number of firms and the ability to monitor individual firms significantly affect the welfare of a wide class of types of regulator.

JEL Classification: D21, D82, L51, Q20