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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 342:
Do Market-Based Incentives Lower the Cost of Compliance?

Magnus Allgulin

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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