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Environmental and Resource Economics

, Volume 41, Issue 2, pp 155–168 | Cite as

To Comply or Not To Comply? Pollution Standard Setting Under Costly Monitoring and Sanctioning

  • Carmen Arguedas
Article

Abstract

In this paper, we characterize optimal regulatory policies composed of a pollution standard, a probability of inspection and a fine for non-compliance, in a context where both monitoring and sanctioning are socially costly, and the penalty may include gravity and non-gravity components at the regulator’s discretion. Under given penalties, the optimal policy entails compliance with the standard as long as a quite intuitive condition is met. Non-compliant policies may include standards even below the pollution levels that minimize the sum of abatement costs and external damages. Interestingly, the appropriate structure of the penalty under non-compliance is highly progressive, while the best possible shape of the fine under compliance is linear. If the regulator is entitled to choose the structure of the fine, linear penalties are socially preferred and the optimal policy induces compliance.

Keywords

Standards Monitoring Convex fines Non-compliance Non-gravity sanctions 

JEL Classification

K32 K42 L51 Q28 

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Copyright information

© Springer Science+Business Media B.V. 2008

Authors and Affiliations

  1. 1.Departamento de Análisis Económico: Teoría Económica e Historia EconómicaUniversidad Autónoma de MadridCantoblanco, MadridSpain

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