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Regulating a Polluting Firm Under Asymmetric Information

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  • Lars Jebjerg
  • Henrik Lando

Abstract

This paper reinterprets the Laffont-Tirole model of regulation under asymmetric information to cover the case of pollution control. The asymmetry of information concerns the firm's cost of lowering its pollution. The regulator has three objectives: Ensuring an efficient abatement level, generating 'green taxes' and securing the survival of the firm. We show that when optimal abatement is important relative to tax generation, the regulator cannot use the policy of offering the firm a set of linear tax schemes from which to choose. By contrast, this policy is optimal in the Laffont-Tirole model under certain not very restrictive assumptions. We proceed to establish a simple rule for when to shut-down inefficient types. In an example with specific functional forms, we derive the optimal tax function both analytically and graphically. We show the effect on the optimal tax system of a change in a technological parameter. Copyright Kluwer Academic Publishers 1997

Suggested Citation

  • Lars Jebjerg & Henrik Lando, 1997. "Regulating a Polluting Firm Under Asymmetric Information," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 10(3), pages 267-284, October.
    • Handle: RePEc:kap:enreec:v:10:y:1997:i:3:p:267-284
    DOI: 10.1023/A:1026471117727
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    References listed on IDEAS

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    1. Suresh P. Sethi, 2021. "Optimal Control Theory," Springer Texts in Business and Economics, Springer, edition 4, number 978-3-030-91745-6, June.
    2. Spulber, Daniel F., 1988. "Optimal environmental regulation under asymmetric information," Journal of Public Economics, Elsevier, vol. 35(2), pages 163-181, March.
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    Cited by:

    1. Christian Elleby & Frank Jensen, 2018. "How Many Instruments Do We Really Need? A First-Best Optimal Solution to Multiple Objectives with Fisheries Regulation," IFRO Working Paper 2018/05, University of Copenhagen, Department of Food and Resource Economics.

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