Magnus Allgulin: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden
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.
23 pages, October 1999
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