Factors that determine the cost-effectiveness ranking of second-best instruments for environmental regulation |
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Authors: | Raúl E O’Ryan |
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Institution: | (1) Center for Applied Economics, Industrial Engineering Department, Universidad de Chile República 701, Santiago, Chile |
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Abstract: | This paper develops a conceptual model to analyze how specific factors affect the compliance costs of three suboptimal policy
instruments, when compared to the optimal ambient permit system (APS) benchmark. The model considers a non-uniformly mixed
pollutant and explicitly incorporates the following factors: number of polluting sources; size, in terms of emissions, of
each process; marginal abatement costs for each process; effluent concentrations; the transfer coefficient that relates emissions
to environmental quality at the receptor; and the desired environmental quality target. APS is compared to a suboptimal emission
permit system (EPS), and two Command and Control (CAC) policies—equal percentage reduction (PER) and a uniform effluent concentration
standard (STD). The results show the importance of the different factors and their interactions in determining each policy
instrument’s cost-effectiveness ranking. Surprisingly, EPS performs well within the usual values of these factors and in specific
cases STD and PER also perform similarly to APS.
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Keywords: | Environmental regulation Policy instrument choice Cost-effectiveness Environmental economics Tradable permits Command and control |
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