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Verifiable and Non-Verifiable Anonymous Mechanisms for Regulating a Polluting Monopolist

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  • James E. Prieger

    (School of Public Policy, Pepperdine University)

  • Nicholas J. Sanders

    (Stanford Institute for Economic Policy Research, Stanford University)

Abstract

Optimal regulation of a polluting natural monopolist must correct for both external damages and market power to achieve a social optimum. Existing non-Bayesian regulatory methods require knowledge of the demand function, while Bayesian schemes require knowledge of the underlying cost distribution. We introduce mechanisms adapted to use less information. Our Price-based Subsidy (PS) mechanisms give the firm a transfer that matches or approximates the incremental surplus generated each period. The regulator need not observe the abatement activity or know the demand, cost, or damage functions of the firm. All of the mechanisms induce the firm to price at marginal social cost, either immediately or asymptotically.

Suggested Citation

  • James E. Prieger & Nicholas J. Sanders, 2011. "Verifiable and Non-Verifiable Anonymous Mechanisms for Regulating a Polluting Monopolist," Discussion Papers 10-034, Stanford Institute for Economic Policy Research.
    • Handle: RePEc:sip:dpaper:10-034
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    2. Dongryul Lee & Kyung Hwan Baik, 2017. "Concealment and verification over environmental regulations: a game-theoretic analysis," Journal of Regulatory Economics, Springer, vol. 51(3), pages 235-268, June.

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    More about this item

    Keywords

    surplus subsidy schemes; polluting monopolist; verifiable regulatory mechanisms;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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