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Truth or Consequences? Enforcing Pollution Standards

Author

Listed:
  • John Livernois
  • C.J. McKenna

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.

Suggested Citation

  • John Livernois & C.J. McKenna, 1996. "Truth or Consequences? Enforcing Pollution Standards," CESifo Working Paper Series 120, CESifo.
    • Handle: RePEc:ces:ceswps:_120
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    Cited by:

    1. Macho-Stadler, Ines & Perez-Castrillo, David, 2006. "Optimal enforcement policy and firms' emissions and compliance with environmental taxes," Journal of Environmental Economics and Management, Elsevier, vol. 51(1), pages 110-131, January.
    2. Inés Macho-Stadler, 2008. "Environmental regulation: choice of instruments under imperfect compliance," Spanish Economic Review, Springer;Spanish Economic Association, vol. 10(1), pages 1-21, March.
    3. Stranlund, John K. & Murphy, James J. & Spraggon, John M., 2011. "An experimental analysis of compliance in dynamic emissions markets," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 414-429.
    4. 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).
    5. Inés Macho-Stadler & David Pérez-Castrillo, 2010. "Optimal monitoring to implement clean technologies when pollution is random," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 1(3), pages 277-304, July.
    6. Arguedas, Carmen & Rousseau, Sandra, 2012. "Learning about compliance under asymmetric information," Resource and Energy Economics, Elsevier, vol. 34(1), pages 55-73.
    7. Khanna Madhu & Widyawati Diah, 2011. "Fostering Regulatory Compliance: The Role of Environmental Self-Auditing and Audit Policies," Review of Law & Economics, De Gruyter, vol. 7(1), pages 125-160, May.
    8. Nyborg, Karine & Telle, Kjetil, 2004. "The role of warnings in regulation: keeping control with less punishment," Journal of Public Economics, Elsevier, vol. 88(12), pages 2801-2816, December.
    9. Hans-Werner Sinn, 1999. "Inflation and Welfare: Comment on Robert Lucas," NBER Working Papers 6979, National Bureau of Economic Research, Inc.
    10. Nyborg, Karine & Telle, Kjetil, 2004. "A dissolving paradox: Firms’ compliance to environmental regulation," Memorandum 02/2004, Oslo University, Department of Economics.
    11. 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.
    12. Spraggon, John, 2002. "Exogenous targeting instruments as a solution to group moral hazards," Journal of Public Economics, Elsevier, vol. 84(3), pages 427-456, June.
    13. Christian Langpap, 2008. "Self-Reporting and Private Enforcement in Environmental Regulation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(4), pages 489-506, August.
    14. maurice moffett & alok k. bohara & kishore gawande, 2005. "Governance and Performance: Theory-Based Evidence from US Coast Guard Inspections," Public Economics 0505002, University Library of Munich, Germany.
    15. Christian Langpap, 2007. "Pollution abatement with limited enforcement power and citizen suits," Journal of Regulatory Economics, Springer, vol. 31(1), pages 57-81, February.
    16. Helfand, Gloria E. & Berck, Peter & Maull, Tim, 2003. "The theory of pollution policy," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 6, pages 249-303, Elsevier.
    17. 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).
    18. Sarah L. Stafford, 2006. "Self-Policing in a Targeted Enforcement Regime," Working Papers 26, Department of Economics, College of William and Mary.
    19. Arun Malik, 2008. "The Desirability of Forgiveness in Regulatory Enforcement," Working Papers 2008-14, The George Washington University, Institute for International Economic Policy.
    20. Arun Malik, 2007. "Optimal environmental regulation based on more than just emissions," Journal of Regulatory Economics, Springer, vol. 32(1), pages 1-16, August.

    More about this item

    Keywords

    pollution control; environmental regulation; compliance; self-reporting;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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