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ENVIRONMENTAL REGULATION WITH INNOVATION AND LEARNING: RULES VERSUS DISCRETION

Nori Tarui and Stephen Polasky

No 21911, 2003 Annual meeting, July 27-30, Montreal, Canada from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: We analyze a model of environmental regulation with learning about environmental damages and endogenous choice of emissions abatement technology by a polluting firm. We compare environmental policy under discretion, in which policy is updated upon learning new information, versus under rules, in which policy is not updated. When investment in abatement technology is made prior to the resolution of uncertainty, neither discretion nor rules with either taxes or standards achieve an efficient solution. When there is little uncertainty, rules are superior to discretion because discretionary policy gives the firm an incentive to distort investment in order to influence future regulation. However, when uncertainty is large, discretion is superior to rules because it allows regulation to incorporate new information. Under discretionary policy, taxes are superior to standards regardless of the relative slopes of marginal costs and marginal damages.

Keywords: Environmental; Economics; and; Policy (search for similar items in EconPapers)
Pages: 47
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea03:21911

DOI: 10.22004/ag.econ.21911

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