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Optimal Pollution Standards and Non-compliance in a Dynamic Framework

Carmen Arguedas, Francisco Cabo and Guiomar Martin-Herran
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Francisco Cabo: Universidad de Valladolid

Environmental & Resource Economics, 2017, vol. 68, issue 3, No 5, 537-567

Abstract: Abstract In this paper we present a Stackelberg differential game to study the dynamic interaction between a polluting firm and a regulator who sets pollution limits overtime. At each time, the firm settles emissions taking into account the fine for non-compliance with the pollution limit, and balances current costs of investments in a capital stock which allows for future emission reductions. We derive two main results. First, we show that the optimal pollution limit decreases as the capital stock increases, while both emissions and the level of non-compliance decrease. Second, we find that offering fine discounts in exchange for firm’s capital investment is socially desirable. We numerically obtain the optimal value of such discount, which crucially depends on the severity of the fine. In the limiting scenario with a very large severity of the fine, the optimal discount implies that no penalties are levied, since the firm shows adequate adaptation progress through capital investment.

Keywords: Dynamic regulation; Stackelberg differential games; Non-compliance; Fines; Pollution standards (search for similar items in EconPapers)
JEL-codes: C61 C73 K32 K42 L51 Q28 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Optimal Pollution Standards and Non-Compliance in a Dynamic Framework (2014) Downloads
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DOI: 10.1007/s10640-016-0031-5

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