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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: IMUVa: Departamento de Economía Aplicada (Matemáticas), Universidad de Valladolid

No 2014/08, 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 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, and balances current costs of investments in a capital stock which allows for future emission reductions. We show that the optimal effective pollution limit path, which is the pollution level above which the fine is truly imposed, decreases overtime, inducing a rise in capital stock and a decrease in both emissions and the level of non-compliance. If the effective pollution limit coincides with the pollution limit set by the regulator, we generally find a bounded value of the severity of the fine that maximizes social welfare. If the effective pollution limit is larger than the pollution limit set by the regulator due to fine discounts in exchange for firm’s investment in capital, the effect of a more severe fine depends on the magnitude of this discount. In the limiting scenario with a sufficiently large severity of the fine, emissions coincide with the effective pollution limit and no penalties are levied, since the firm shows adequate adaptation progress through capital investment.

Keywords: non-compliance; fines; pollution standards; dynamic regulation; Stackelberg differential games. (search for similar items in EconPapers)
JEL-codes: C61 C73 K32 K42 L51 Q28 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2014-11
New Economics Papers: this item is included in nep-ene, nep-env and nep-res
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http://www.uam.es/departamentos/economicas/analecon/especifica/mimeo/wp20148.pdf

Related works:
Journal Article: Optimal Pollution Standards and Non-compliance in a Dynamic Framework (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:uam:wpaper:201408

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