Pollution Standards, Technology Investment and Fines for Non-Compliance

Carmen Arguedas

No 2010/05, Working Papers in Economic Theory from Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History)

Abstract: 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.

Keywords: pollution standards; costly inspections; environmentally friendly technologies; non-compliance; optimal fines. (search for similar items in EconPapers)
JEL-codes: K32 K42 L51 Q28 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2010-04
New Economics Papers: this item is included in nep-ene, nep-env, nep-law and nep-reg
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Related works:
Journal Article: Pollution standards, technology investment and fines for non-compliance (2013)
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