SSE/EFI Working Paper Series in Economics and Finance
Do Market-Based Incentives Lower the Cost of Compliance?
Abstract: This paper analyzes policies for regulating polluting
firms under imperfect monitoring. The main finding is that a certain
emission target is always more costly to enforce if there exists a market
for emission permits than if there is none. The intuition is that a market
restricts the regulatory agency to imposing incentive schemes which are
linear in firms' emission levels, and these are less powerful than the best
non-linear incentive schemes. Another result is that monitoring and
monetary incentives are complementary policy instruments.
Keywords: Monitoring; quota; market; emission permits; (follow links to similar papers)
JEL-Codes: Q28; Q38; (follow links to similar papers)
23 pages, October 1999
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