To Tell the Truth: Imperfect Information and Optimal Pollution Control

Dynamic environmental policy with strategic firms: prices versus quantities

“…1 Weitzman's model is static, so firms cannot strategically manipulate the regulator's beliefs about costs via their abatement strategy. Kwerel [7] developed a hybrid price-quantity instrument that induces competitive firms to reveal their true costs to the regulator, who then implements a first-best outcome. More recently, Kaplow and Shavell [6] claimed that the first-best outcome can also be achieved with a non-linear tax set equal to the (non-linear) pollution damage function.…”

“…One could also think of our regulator's adjustment rule as a legislative mandate or statute that firms in the affected industry can influence through their actions. However one chooses to interpret the regulator's rule, it should be kept in mind that there is an important difference between our model, and that of Kwerel [7] and others in the mechanism-design literature. In mechanism design, the regulator implements a mechanism for which it is optimal for firms to reveal information truthfully.…”

A Note on Pollution Regulation with Asymmetric Information

“…The seminal works by Weitzman (1974) and(1978) focused on the relative performance of price and quantity instruments when benefit or abatement cost functions are imperfectly known and on this line of research another important contribution was Roberts and Spence (1976) proposal of a mixed tax and licences scheme. A different approach was pioneered by Kwerel (1977) who proposed a mechanism to induce truthful revelation of abatement cost function by polluting firms: it encompasses issuing the optimal number of transferable licences and paying a subsidy for licences hold in excess of emissions. Some shortcomings of this scheme were evidenced by Dasgupta Hammond and Maskin (1980) who proposed alternative solutions drawing heavily on the literature on incentive compatible mechanisms for the provision of public goods.…”

The Regulation of Environmental Innovations

“…The bulk of the literature on environmental regulation deals with pollution emitted as a byproduct of daily production activities under various forms of asymmetric information [3,4,7,10,11,17,20,21]. The multiplicity of polluters justifies the use of a natural regulatory instrument, namely markets for pollution permits, on which a large part of the literature revolves.…”