To Comply or Not To Comply? Pollution Standard Setting Under Costly Monitoring and Sanctioning

In this paper, we characterize optimal regulatory policies composed of pollution standards, probabilities of inspection and fines for non-compliance, in a context where both monitoring and sanctioning are socially costly, and penalties may include gravity and non-gravity components at the regulator's discretion. The optimal policy entails compliance with the standards as long as a quite intuitive condition is met. Non-compliant policies may include standards even below the pollution levels that minimize the sum of abatement costs and external damages. Interestingly, the appropriate structure of penalties under non-compliance is highly progressive, while the best possible shape of the fines under compliance is linear only if non-gravity sanctions are not allowed.standards; monitoring; convex fines; non-compliance; non-gravity sanctions

Enviromental standards and costly monitoring.

In this paper, we investigate the features of an optimal regulatory policy composed of pollution standards and probabilities of inspection to verify firms' behavior, where fines for noncompliance depend on the degree of violation. We find that the optimal policy can entail either compliance or noncompliance with the enviromental standards, the latter being more plausible when monitoring costs are high and, surprisingly, when fines for noncompliance are also high. In the event the planner has perfect information about the firns, we find that, whe the optimal policy entails noncompliance, the optimal standard is always equal to zero, suggesting the superiority of probabilistic environmental taxes versus positive standards. However this is no longer true when the planner has incomplete information about the regulated agents.standard-setting; costly inspection; convex fines;

Pollution Standards, Technology Investment and Fines for Non-Compliance

In this paper, we analyze whether it is socially desirable that fines for exceeding pollution standards depend not only on the degree of non-compliance but also on the firm's level of investment in environmentally friendly technologies. For that purpose, we consider a partial equilibrium framework where a representative firm chooses the pollution level and the investment effort in response to an environmental policy composed of a pollution standard, an inspection probability and a fine for non-compliance. We find that the fine should not depend on the firm's investment effort if the optimal policy induces compliance. However, the fine should strictly decrease with investment effort under non-compliance and positive social costs of sanctioning. Interestingly, the optimal fine considers the relative importance of monitoring and sanctioning costs in the enforcement problem.pollution standards; costly inspections; environmentally friendly technologies; non-compliance; optimal fines.

Learning about compliance under asymmetric information

Over time, inspection agencies gather information about firms that cause harmful externalities. This information may allow agencies to differentiate their monitoring strategies in the future, since inspections can be influenced by firms' past performance relative to other competitors in the market. If a firm is less successful than it peers in reducing the externality, if faces the risk of being targeted for increased inspections in the next period This risk of stricter monitoring might induce high cost firms to mimic low cost firms, while the latter might try to avoid being mimicked We show that under certain circumstances, mimicking, or even the threat of mimicking, might reduce socially harmful activities and thus be welfare improving.monitoring and enforcement, externalities, learning, mimicking

Learning about compliance under asymmetric information

Over time, inspection agencies gather information about firms that cause harmful externalities. This information may allow agencies to differentiate their monitoring strategies in the future, since inspections can be influenced by firms’ past performance relative to other competitors in the market. If a firm is less successful than its peers in reducing the externality, it faces the risk of being targeted for increased inspections in the next period. This risk of stricter monitoring might induce high cost firms to mimic low cost firms, while the latter might try to avoid being mimicked. We show that under certain circumstances, mimicking, or even the threat of mimicking, might reduce socially harmful activities and thus be welfare improving.Monitoring and enforcement; externalities; learning; mimicking

Allocating environmental costs among heterogeneous sources: The linear damage equivalent mechanism.

A group of firms has to divide the costs associated with environmental damages jointly generated as a by-product of their heterogeneous production activities. We propose a specific procedure to assign costs, the Linear Damage Equivalent Mechanism (LDE), which satisfies several appealing strategic and axiomatic properties. The LDE induces a strategic game that has an unambiguous noncooperative prediction, a unique Nash equilibrium which is also robust to coalitional deviations; moreover, the equilibrium is efficient. Among its other properties, we find that the LDE is immune to arbitrary changes in the units of account of the outputs.Environmental damages; Cost-sharing; Heterogeneous sources;

A Note on the Complementarity of Uniform Emission Standards and Monitoring Strategies

Despite the well-known static cost-inefficiency of uniform emission standards to control pollution, governments continue to use them in a variety of settings. In this paper, we show that inspection agencies can sometimes use their informational advantage to design monitoring strategies that complement uniform emission standards in restoring efficiency.pollution standards; monitoring; non-compliance.

Effluent limits, ambient quality, and monitoring

Effluent limits are frequently based on a uniform emission standard, which applies to all polluting facilities within in a single industry. However, the implementation of many environmental protection laws does not lead to uniform effluent limits due to considerations of local environmental conditions. In this paper, we theoretically examine the relationships among the stringency of effluent limits imposed on individual polluting facilities, environmental protection agencies’ monitoring decisions, and the ambient quality of the local environment. We then extend the theoretical analysis by exploring the establishment of effluent limits when (1) the national emission standard represents only an upper bound on the local issuance of limits and (2) negotiation efforts expended by both regulated polluting facilities and environmentally concerned citizens play a role. We find that the negotiated discharge limit depends on the political weight enjoyed and the negotiation effort costs faced by both citizens and the regulated facility, along with the stringency of the national standard and local ambient quality condition

Enviromental standards and costly monitoring

In this paper, we investigate the features of an optimal regulatory policy composed of pollution standards and probabilities of inspection to verify firms' behavior, where fines for noncompliance depend on the degree of violation. We find that the optimal policy can entail either compliance or noncompliance with the enviromental standards, the latter being more plausible when monitoring costs are high and, surprisingly, when fines for noncompliance are also high. In the event the planner has perfect information about the firns, we find that, whe the optimal policy entails noncompliance, the optimal standard is always equal to zero, suggesting the superiority of probabilistic environmental taxes versus positive standards. However this is no longer true when the planner has incomplete information about the regulated agents

Equilibrium Nonexistence in Spatial Competition with Quadratic Transportation Costs

Under quadratic transportation costs, the existence of the sequential first-locate-thenprice equilibrium in spatial competition is well known in the literature. In this paper, we find that the equilibrium may fail to exist under certain restrictions with respect to the location of firms and consumers in the market. This result is valid for both the linear and the circular modelsProduct differentiation; circular model; linear model; quadratic transportation costs; sequential equilibrium