Getting Polluters to Tell the Truth

Marcelo Caffera and Juan Dubra ()
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Marcelo Caffera: Universidad de Montevideo

Microeconomics from EconWPA

Abstract: We study the problem of a regulator who must control the emissions of a given pollutant from a series of industries when the firms' abatement costs are unknown. We develop a mechanism in which the regulator asks firms to report their abatement costs and implements the most stringent emissions standard consistent with the firms' declarations. He also inspects one of the firms in each industry which declared the cost structure consistent with the least stringent emissions standard and with an arbitrarily small probability, he discovers whether the report was true or not. The firm is punished with an arbitrarily small fine if and only if its report was false. This mechanism is simple, is implementable in practice, its unique equilibrium is truth telling by firms, it implements the first best pollution standards and shares some features of the regulatory processes actually observed in reality.

Keywords: Emissions Standards; Command and Control; Undominated Nash Implementation (search for similar items in EconPapers)
JEL-codes: D78 D82 Q20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-res
Date: Written 2005-04-25
Note: Type of Document - pdf; pages: 14
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