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Optimal Pollution Standards and Non-Compliance in a Dynamic Framework

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  • Arguedas, Carmen

    (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)

  • Cabo, Francisco

    (IMUVa: Departamento de Economía Aplicada (Matemáticas), Universidad de Valladolid)

  • Martín-Herrán, Guiomar

    (IMUVa: Departamento de Economía Aplicada (Matemáticas), Universidad de Valladolid)

Abstract

In this paper we present a Stackelberg differential game to study the dynamic interaction between a polluting firm and a regulator who sets pollution limits overtime. At each time, the firm settles emissions taking into account the fine for non-compliance, and balances current costs of investments in a capital stock which allows for future emission reductions. We show that the optimal effective pollution limit path, which is the pollution level above which the fine is truly imposed, decreases overtime, inducing a rise in capital stock and a decrease in both emissions and the level of non-compliance. If the effective pollution limit coincides with the pollution limit set by the regulator, we generally find a bounded value of the severity of the fine that maximizes social welfare. If the effective pollution limit is larger than the pollution limit set by the regulator due to fine discounts in exchange for firm’s investment in capital, the effect of a more severe fine depends on the magnitude of this discount. In the limiting scenario with a sufficiently large severity of the fine, emissions coincide with the effective pollution limit and no penalties are levied, since the firm shows adequate adaptation progress through capital investment.

Suggested Citation

  • Arguedas, Carmen & Cabo, Francisco & Martín-Herrán, Guiomar, 2014. "Optimal Pollution Standards and Non-Compliance in a Dynamic Framework," Working Papers in Economic Theory 2014/08, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
  • Handle: RePEc:uam:wpaper:201408
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    2. Yang, Yuxiang & Goodarzi, Shadi & Bozorgi, Ali & Fahimnia, Behnam, 2021. "Carbon cap-and-trade schemes in closed-loop supply chains: Why firms do not comply?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 156(C).
    3. Guiomar Martín-Herrán & Santiago J. Rubio, 2016. "The Strategic Use of Abatement by a Polluting Monopoly," Working Papers 2016.58, Fondazione Eni Enrico Mattei.
    4. Hao Xu & Ming Luo, 2022. "Optimal Environmental Policy in a Dynamic Transboundary Pollution Game: Emission Standards, Taxes, and Permit Trading," Sustainability, MDPI, vol. 14(15), pages 1-25, July.
    5. Parilina, Elena & Yao, Fanjun & Zaccour, Georges, 2024. "Pricing and investment in manufacturing and logistics when environmental reputation matters," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 184(C).
    6. Guiomar Martín-Herrán & Santiago J. Rubio, 2016. "The Strategic Use of Abatement by a Polluting Monopoly," Working Papers 2016.58, Fondazione Eni Enrico Mattei.
    7. Xuexian Gao & Haidong Zheng & Yan Zhang & Naser Golsanami, 2019. "Tax Policy, Environmental Concern and Level of Emission Reduction," Sustainability, MDPI, vol. 11(4), pages 1-17, February.
    8. Arguedas, Carmen & Cabo, Francisco & Martín-Herrán, Guiomar, 2020. "Enforcing regulatory standards in stock pollution problems," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).

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    More about this item

    Keywords

    non-compliance; fines; pollution standards; dynamic regulation; Stackelberg differential games.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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