Regulation of Location-Specific Externalities from Small-Scale Polluters

Emission damages caused by small-scale polluters such as farms, vehicles, homes and small businesses are often location-specific and such polluters are often regulated through a combination of location-differentiated cleaner technology standards and uniform, ʻdirtyʼ input regulation. We investigate how such regulations should be designed and combined under realistic assumptions. We find that if the available cleaner technologies are ‘emission capturing’ (e.g., end-of-pipe filters), they should be encouraged in both high and low damage areas, while if they are ‘input displacing’ (i.e., facilitating replacement of dirty input by cleaner input), they should be encouraged in high damage areas, but discouraged in low damage areas. Dirty input use should always be discouraged and the optimal regulation intensity may be substantial, particularly if the available cleaner technologies are input displacing.