Optimal Monitoring to Implement Clean Technologies when Pollution is Random
35 Pages Posted: 26 Apr 2007
Date Written: April 2007
We analyze a model where firms chose a production technology which, together with some random event, determines the final emission level. We consider the coexistence of two alternative technologies: a "clean" technology, and a "dirty" technology. The environmental regulation is based on taxes over reported emissions, and on penalties over unreported emissions. We show that the optimal inspection policy is a cut-off strategy, for several scenarios concerning the observability of the adoption of the clean technology and the cost of adopting it. We also show that the optimal inspection policy induces the firm to adopt the clean technology if the adoption cost is not too high, but the cost levels for which the firm adopts it depend on the scenario.
Keywords: production technology, random emissions, environmental taxes, optimal monitoring policy
JEL Classification: K32, K42, D82
Suggested Citation: Suggested Citation