The Optimal Pricing of Pollution When Enforcement is Costly

29 Pages Posted: 20 Apr 2007

See all articles by John Stranlund

John Stranlund

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics

Carlos A. Chavez

University of ConcepciĆ³n - Departamento de Economia

Mauricio G. Villena

Adolfo Ibanez University

Date Written: April 2007

Abstract

We consider the pricing of a uniformly mixed pollutant when enforcement is costly with a model of optimal, possibly firm-specific, emissions taxes and their enforcement. We argue that optimality requires an enforcement strategy that induces full compliance by every firm. This holds whether or not regulators have complete information about firms' abatement costs, the costs of monitoring them for compliance, or the costs of collecting penalties from noncompliant firms. Moreover, ignoring several unrealistic special cases, optimality requires discriminatory emissions taxes except when regulators are unable to observe firms' abatement costs, the costs of monitoring individual firms, or any firm-specific characteristic that is known to be jointly distributed with either the firms' abatement costs or their monitoring costs. In many pollution control settings, especially those that have been subject to various forms of environmental regulation in the past, regulators are not likely to be so ill-informed about individual firms. In these settings, policies that set or generate a uniform pollution price like conventional designs involving uniform taxes and competitive emission trading with freely-allocated or auctioned permits will not be efficient.

Keywords: Compliance, Enforcement, Emissions Taxes, Monitoring, Asymmetric Information, Uncertainty

JEL Classification: L51, Q58

Suggested Citation

Stranlund, John and Chavez, Carlos A. and Villena, Mauricio G., The Optimal Pricing of Pollution When Enforcement is Costly (April 2007). Available at SSRN: https://ssrn.com/abstract=981213 or http://dx.doi.org/10.2139/ssrn.981213

John Stranlund (Contact Author)

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics ( email )

Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003-9246
United States
413-545-6328 (Phone)

Carlos A. Chavez

University of ConcepciĆ³n - Departamento de Economia ( email )

Victoria 471
Oficina 242
Victor Lamas, Conception 1290
Chile

Mauricio G. Villena

Adolfo Ibanez University ( email )

Santiago, 794-1169
Chile

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