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Controlling Pollution with Relaxed Regulations

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  • Carmen Arguedas
  • Hamid Hamoudi

Abstract

We investigate the features of optimal environmental policies composed of pollution standards and costly inspection processes, where fines for exceeding the standards depend both on the degree of transgression and the environmental technology that the firm uses to reduce the social impact of its polluting activity. We show that the main characteristics of these policies depend crucially on when the firm selects that technology with respect to the timing of the policy announcement. In fact, the firm has incentives to over-invest in green technologies when the policy is announced afterwards; and to under-invest in them if the environmental authority plays first. Surprisingly, we find that both the firm and the regulator prefer that the firm invests in technology before the policy is announced, even when this implies that expected penalties for noncompliance might be zero.

Suggested Citation

  • Carmen Arguedas & Hamid Hamoudi, 2004. "Controlling Pollution with Relaxed Regulations," Journal of Regulatory Economics, Springer, vol. 26(1), pages 85-104, July.
    • Handle: RePEc:kap:regeco:v:26:y:2004:i:1:p:85-104
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    Citations

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    Cited by:

    1. André Barreira da Silva Rocha, 2013. "An Evolutionary Game for the Issues of Social Investment, Environmental Compliance and Consumer Boycott," Discussion Papers in Economics 13/17, Division of Economics, School of Business, University of Leicester.
    2. Carmen Arguedas, 2008. "To Comply or Not To Comply? Pollution Standard Setting Under Costly Monitoring and Sanctioning," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(2), pages 155-168, October.
    3. John Stranlund, 2007. "The regulatory choice of noncompliance in emissions trading programs," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 38(1), pages 99-117, September.
    4. Basak Bayramoglu, 2010. "How does the design of international environmental agreements affect investment in environmentally-friendly technology?," Post-Print hal-01172961, HAL.
    5. Sverre Grepperud, 2015. "Optimal safety standards when accident prevention depends upon both firm and worker effort," European Journal of Law and Economics, Springer, vol. 39(3), pages 505-521, June.
    6. Carmen Arguedas, 2013. "Pollution standards, technology investment and fines for non-compliance," Journal of Regulatory Economics, Springer, vol. 44(2), pages 156-176, October.
    7. da Silva Rocha, André Barreira & Salomão, Gabriel Meyer, 2019. "Environmental policy regulation and corporate compliance in evolutionary game models with well-mixed and structured populations," European Journal of Operational Research, Elsevier, vol. 279(2), pages 486-501.
    8. Dijkstra, Bouwe R., 2007. "An investment contest to influence environmental policy," Resource and Energy Economics, Elsevier, vol. 29(4), pages 300-324, November.
    9. Alessio D’Amato & Bouwe R. Dijkstra, 2018. "Adoption incentives and environmental policy timing under asymmetric information and strategic firm behaviour," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 20(1), pages 125-155, January.
    10. Chongwoo Choe & Charles E. Hyde, 2007. "Multinational Transfer Pricing, Tax Arbitrage and the Arm's Length Principle," The Economic Record, The Economic Society of Australia, vol. 83(263), pages 398-404, December.
    11. Arun Malik, 2007. "Optimal environmental regulation based on more than just emissions," Journal of Regulatory Economics, Springer, vol. 32(1), pages 1-16, August.
    12. Arguedas, Carmen, 2005. "Bargaining in environmental regulation revisited," Journal of Environmental Economics and Management, Elsevier, vol. 50(2), pages 422-433, September.

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