FEEM working papers "Note di lavoro" series
2016 .020

A Note on Pollution Regulation With Asymmetric Information


Authors: Pench, Alberto
Series: Economic Theory
Editor: Carlo Carraro
Keywords: Effluent Fee, Standards, Asymmetric Information, Truthful Revelation
JEL n.: H23, Q5

Abstract

The paper addresses the problem of information asymmetry between a regulator and the polluting firms and proposes a very simple mechanism where the regulator is free to choose, without communicating in advance to the firms, between two instruments: an effluent fee or a standard: as a result in a real world setting this uncertainty might induce firms to a truthful revelation. Moreover, under the assumption of linear marginal abatement or marginal social damage functions, in many cases the resulting optimal behaviour might be an under reporting for some firms and an over reporting for others so that the resulting marginal aggregate benefit function might be not so far from the true one and the aggregate pollution level attained by the mechanism not so far from optimal.

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Suggested citation: Pench, A., (2016), 'A Note on Pollution Regulation With Asymmetric Information',  Nota di Lavoro  20.2016, Milan, Italy: Fondazione Eni Enrico Mattei

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