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Truth or Consequences? Enforcing Pollution Standards

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Author Info
Livernois, John
McKenna, C.J.

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Abstract

Evidence suggests that a surprisingly large fraction of firms comply with pollution emission standards even though expected penalties for noncompliance are low. We offer an explanation of this puzzle by extending the standard model of enforcement to include a self-reporting requirement and enforcement power. These extensions are enough to overturn the conventional result that higher fines lead to higher compliance rates. Specifically, under plausible conditions, higher compliance rates are achieved with lower fines for noncompliance. In addition, the cost of enforcing a given level of aggregate pollution is then minimized by setting the fine for noncompliance equal to zero.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 120.

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Date of creation: 1996
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Handle: RePEc:ces:ceswps:_120

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Related research
Keywords: pollution control; environmental regulation; compliance; self-reporting;

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Find related papers by JEL classification:
D62 - Microeconomics - - Welfare Economics - - - Externalities
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

Cited by:
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  1. Guerrero, Santiago & Innes, Robert, 2008. "Statutory Rewards to Environmental Self-Auditing: Do They Reduce Pollution and Save Regulatory Costs? Evidence from a Cross-State Panel," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6204, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  2. Arguedas, Carmen, 2005. "Pollution standards, costly monitoring and fines," Discussion Paper 9, Tilburg University, Center for Economic Research. [Downloadable!]
  3. John Spraggon, 1998. "Exogenous Targeting Instruments as a Solution to Group Moral Hazards," Department of Economics Working Papers 1998-01, McMaster University. [Downloadable!]
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  4. Huennemeyer, Anne-Juliane & McKitrick, Ross & Rollins, Kimberly S., 1999. "Optimal Compensation For Endangered Species Protection Under Asymmetric Information," 1999 Annual meeting, August 8-11, Nashville, TN 21693, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  5. maurice moffett & alok k. bohara & kishore gawande, 2005. "Governance and Performance: Theory-Based Evidence from US Coast Guard Inspections," Public Economics 0505002, EconWPA. [Downloadable!]
  6. Sarah L. Stafford, 2006. "Self-Policing in a Targeted Enforcement Regime," Working Papers 26, Department of Economics, College of William and Mary. [Downloadable!]
  7. Nyborg, Karine & Telle, Kjetil, 2003. "The Role of Warnings in Regulation: Keeping Control with Less Punishment," Memorandum 24/2003, Oslo University, Department of Economics. [Downloadable!]
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  8. Arguedas, Carmen & Rousseau, Sandra, 2008. "Learning about compliance under asymmetric information," Working Papers in Economic Theory 2008/02, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History). [Downloadable!]
    Other versions:
  9. Arguedas, Carmen, 2007. "To Comply or Not To Comply? Pollution Standard Setting Under Costly Monitoring and Sanctioning," Working Papers in Economic Theory 2007/13, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History). [Downloadable!]
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  10. Sinn, Hans-Werner, 1999. "Inflation and Welfare: Comment on Robert Lucas," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  11. Nyborg, Karine & Telle, Kjetil, 2004. "A dissolving paradox: Firms’ compliance to environmental regulation," Memorandum 02/2004, Oslo University, Department of Economics. [Downloadable!]
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