Random wastes,imperfect monitoring and environmental quality standards

This paper considers a firm's choice of optimal pollution abatement strategy in an environment where pollution licences are purchased through a market and a fine is levied for pollution in excess of the licences held. The pollution associated with any level of abatement is stochastic and the authority monitors pollution via a random sample of observations. Firms choose cost-minimising values for the mean and variance of emissions and the authority selects its sample size and the number of licences issued to achieve an exogenous level of environmental quality with abatement costs and monitoring costs at a minimum level.