Nonpoint Source Pollution Taxes and Excessive Tax Burden

If a regulator is unable to measure firms’ individual emissions, an ambient tax can be used to achieve the socially desired level of pollution. With this tax, each firm pays a unit tax on aggregate emissions. In order for the tax to be effective, firms must recognize that their decisions affect aggregate emissions. When firms behave strategically with respect to the tax-setting regulator, under plausible circumstances their tax burden is lower under an ambient tax, relative to the tax which charges firms on the basis of individual emissions. Firms may prefer the case where the regulator is unable to observe individual firm emissions, even if this asymmetric information causes the regulator to tax each firm on the basis of aggregate emissions.     

Eco-labels, Trade and Protectionism

Eco-labels are suspected to serve protectionist purposes. We analyze the choice between an environmental standard and a voluntary eco-label scheme in a partial trade model with one domestic firm and one foreign firm. The environmental standard will only apply to the domestic firm, while both firms can adopt the eco-label. Pollution is production related, and domestic consumers demand products that are produced in an “environmentally friendly” way. Our results show that it may be optimal for the domestic government to introduce an eco-label and get both firms to adopt the label, instead of setting an environmental standard. However, to what extent this policy serves protectionist purposes is ambiguous. In particular, if the willingness to pay for green products is sufficient to cover the pollution abatement costs of the foreign firm, foreign firm profit will increase while domestic firm profit will decrease compared to the outcome with a domestic environmental standard. On the other hand, if the willingness to pay for green products is insufficient, the foreign firm would be better off with a domestic environmental standard.     

Optimal pollution taxation in a Cournot duopoly

It is well known that the optimal pollution tax in a competitive industry is equal to the marginal damage inflicted by the pollution. It has also been shown that the optimal pollution tax on a monopoly is less than the marginal damage. In this paper, I derive the optimal pollution tax for a Cournot duopoly. If firms have different production costs, the optimal tax rate may exceed the marginal damage. This is so because the tax may be an effective instrument for allocating production from the less to the more efficient firm. It is also shown that, if one firm has a positive most preferred pollution tax, the sum of consumer and producer surpluses will be declining in the tax at this level.     

Standards and the regulation of environmental risk

We study regulatory design for a pollution-generating firm who is better informed than the regulator regarding pollution mitigation possibilities, and who chooses an unobservable action when employing a particular mitigation plan. We distinguish among performance, process, and design standards, and study the relative merit of each type of regulatory instrument. Relative to previous work on standards design, we emphasize technology and process verification. An optimal performance standard is relatively strict when regulator and firm preferences are congruent, but the regulator may prefer no performance standard at all if verification costs are sufficiently high. A process standard unambiguously increases expected surplus (relative to no regulation) in some environments, and otherwise improves welfare only when it is unlikely to generate a “bad” technology choice by the firm. A design standard can improve welfare if the regulator is sufficiently well informed about the technological possibilities for pollution control, but only when the firm’s private benefits from technology choice are sufficiently small.     

Production and Abatement Distortions under Noisy Green Taxes

A pollution regulator seeking to maximize social surplus can be viewed as facing two efficiency problems. One is that, given abatement technology investment decisions, it should attempt to ensure that firms which should produce do produce and firms which should not produce do not produce. This ex-post efficiency problem is not trivial when there is noise concerning the extent of environmental damage a firm does. We use a Bayesian information framework to show that the regulator may find it efficient to tax a firm that reads as a high (low) damage polluter at less (more) than the damage reading. Unfortunately when an abatement decision has to be made, this ex-post efficient tax system also dampens the incentive to abate. In the absence of wrong-firm concerns, a regulator can solve the abatement problem by an ex ante declaration that taxes will not be adjusted for signal noise. However, the regulator has a commitment problem as such taxes may not be ex-post efficient. The most appropriate policy may involve a combination of instruments.     

Regulating Multiple Polluters: Deterrence and Liability Allocation

We consider regulation of multiple polluters when individual emissions are unobservable. The tension between pollution deterrence and funding of remediation is examined under two constraints: that penalty revenues fully fund remediation costs and that the regulator cannot make positive transfers to firms. To isolate the effect of increasing the number of polluters, we compare an industry consisting of a single large firm with one in which many small firms in aggregate mimic the large firm. Contrary to previous findings, both the number of firms and the ability to monitor individual firms affect the welfare of a large class of regulators.     

Beyond the need to boast: Cost concealment incentives and exit in Cournot oligopoly

This paper studies the incentives for production cost disclosure in an asymmetric Cournot oligopoly. Whereas the efficient firm (consumers) prefers information sharing (concealment) when the firms choose accommodating strategies in the product market, the firm (consumers) may prefer information concealment (sharing) when it can exclude its competitors from the market. Hence, the rankings of expected profit and consumer surplus can be reversed if exit of the inefficient firms is possible. Although the efficient firm has stronger incentives to share information when it shares strategically, there remain cases in which the firm conceals information in equilibrium to induce exit.     

Influence of market-level and inter-firm differences in costs on product positioning and pricing

The objective of this article is to study the impact of differentiation and firm positioning on firm’s pricing decisions in a horizontally differentiated competitive market. We build a parsimonious game-theoretic model and analyse simultaneous entry of firms. The effect of differentiation is modelled as an additional cost incurred by both firms based on the degree of differentiation between the firms. The cost of positioning is modelled as a market level cost affecting both firms whereby firms incur a cost if they want to position themselves away from the centre of distribution of consumers. Our analysis provides some surprising results, explains some conflicting empirical observations documented in previous research and may also be useful for further empirical research in this area by providing sharper predictions about the impact of various types of costs on market outcomes. For example, we find that if the cost of positioning is sufficiently high, then a firm with lower cost of differentiation charges a higher price in equilibrium, even when no differences in exogenous costs exist. We also find that under some circumstances the cost disadvantaged firm can enjoy higher price-cost margins compared to the cost leader thereby suggesting that higher costs could be a blessing in disguise.     

Environmental regulatory enforcement with “green” consumers

We consider a standard probabilistic model of random monitoring to analyze the interactions between a firm and a monitoring agency in the presence of “green” consumers when compliance payoffs are contingent on monitoring and monitoring costs are shared by the monitoring agency and the firm. When the amount paid by the firms if monitored is exogenously fixed, we find that full compliance is implemented with a finite fine. If there is an upper bound for the fine and the regulator determines endogenously the fine and the amount paid by the firms if monitored, we find that full compliance is also achieved, although the optimal fine is now set at its maximum level. The optimal amount paid by the firms if monitored is lower than the environmental premium the compliant firm gets.The author thanks two anonymous referees for their useful comments and suggestions     

ASYMMETRIC INFORMATION AND EXCHANGE OF INFORMATION ABOUT PRODUCT DIFFERENTIATION

We introduce asymmetric information about consumers’ transportation costs (i.e., the degree of product differentiation) in the model of Hotelling. When transportation costs are high, both firms have lower profits with asymmetric information than with perfect information. Contrarily, if transportation costs are low, both firms may prefer the asymmetric information scenario (the informed firm always prefers the informational advantage, while the uninformed firm may or may not prefer to remain uninformed). Information exchange is ex‐ante advantageous for both firms, but ex‐post damaging if transportation costs turn out to be low. If the information is unverifiable, the informed firm does not represent a reliable source of information, since it always prefers to announce that transportation costs are high and there is no contract that induces truthful revelation.     

Strategic managerial dishonesty and financial distress

This paper analyzes the effect of stricter sanctions against fraudulent disclosure in an economy where commercial lenders have only an imperfect information about the type of the firm they trade with. In the hybrid Bayesian equilibrium, some managers running fragile firms claim that their firm is solid only to benefit of better commercial credit terms. The default premium charged by the supplier over the normal cost can be interpreted here as an indirect bankruptcy cost. When the sanction gets heavier, both the default premium and the frequency of defaulting firms go up. Under given circumstances, these perverse effects might be offset by a decline in direct bankruptcy costs.     

Taxes,permits, and the diffusion of a new technology

This study looks at the effects of the choice between taxes and permits on the pattern of adoption of a new (pollution) emissions abatement technology. It uses a dynamic setting, where the regulator observes the arrival and initial use of the technology and determines the optimal ex post amount of emissions before firms start to adopt the technology.In the model here, the adoption benefits and costs depend on the number of firms that are already using the technology. Thus, each firm decides the optimal date to adopt the technology, considering its benefits and costs, as well as the advantage they will gain over their rivals, producing a sequence of adoption that is “diffused” into the industry over time.With this framework, the study shows that when the output demand is elastic, auctioned permits induce an earlier diffusion than taxes.     

A Note on Emissions Taxes and Incomplete Information

In contrast with what we perceive is the conventional wisdom about setting a second-best emissions tax to control a uniformly mixed pollutant under uncertainty, we demonstrate that setting a uniform tax equal to expected marginal damage is not generally efficient under incomplete information about firms’ abatement costs and damages from pollution. We show that efficient taxes will deviate from expected marginal damage if marginal damage is increasing and there is uncertainty about the slopes of the marginal abatement costs of regulated firms. Moreover, tax rates will vary across firms if a regulator can use observable firm-level characteristics to gain some information about how the firms’ marginal abatement costs vary.     

Endogenous overhead costs,firm size,and fiscal shocks

Recent empirical observations indicate that firm size responds to cyclical fluctuations in economic activities. By analyzing the effects of endogenous overhead costs in the economy, this paper finds that in response to a fiscal expansion, firm size will increase if the relationship between overhead costs and the number of firms is positive, while firm size will decrease if the relationship is negative.     

Lobbying and the power of multinational firms

Can multinational firms exert more power than national firms by influencing politics through lobbying? To answer this question, we analyze the extent of national environmental regulation when policy is determined in a lobbying game between a government and a firm. We compare the resulting equilibrium regulation levels, outputs and welfare in a game with a multinational firm with those in an otherwise identical game with a national firm. For low transportation costs, output and pollution of a national firm are always as least as high as for a multinational; this changes for high transportation costs and intermediate damage parameters. When there is no lobbying, welfare levels are always higher with multinationals than with national firms. However, the existence of lobbying may reverse this ordering.     

Tradeable permits,missing markets,and technology

This paper examines the effects of missing markets, heterogeneous pollutants, and the pollution technology of firms on the efficacy of transferable pollution permits. Under the assumption of perfect competition in all markets, we show that if firms can substitute among pollutants, then setting the optimal number of permits for only one pollutant will not, in general, lead to an efficient outcome. The degree of the inefficiency will depend on the information set available to the regulator and the substitutability among pollutants by firms. When establishing transferable pollution rights regulators should, therefore, consider the technology of firms. If firms discharge pollutants in the same fixed proportions, then the regulator need only set a market for one of the pollutants to ensure an efficient outcome. Where firms can substitute among pollutants, however, establishing a market for only one pollutant provides an incentive for firms to substitute to unregulated ones. This is an important policy issue as substitutability among pollutants within and across production processes may dampen the dynamic advantages of a tradeable permit policy.     

Strategic Trade Policy and Signalling with Unobservable Costs

In an environment in which home firm costs are private information, home firm output can signal these costs to a foreign competitor and a home policymaker. High-cost home firms have an incentive to misrepresent themselves as low-cost. This is understood by the foreign firm and the home policymaker and results in the first-period optimal per-unit output subsidy to the home firm being less than it would be if home firm output was not a signal of home firm costs. These results are extended to the case of simultaneous signalling and signalling through price.     

Which Firms are More Sensitive to Public Disclosure Schemes for Pollution Control? Evidence from Indonesia’s PROPER Program

This paper analyzes differences in firms’ responsiveness to PROPER, Indonesia’s public disclosure program for industrial pollution control. The overall effectiveness of this program at achieving emissions reductions and its low regulatory costs have earned it a good reputation around the world. PROPER had no deterrents or incentives other than those that arose indirectly from publicly disclosing information about the environmental performances of firms. We analyzed plant-level data to relate short- and longer-term environmental responses to facility characteristics. The results revealed that foreign-owned firms were consistently more likely to respond to the environmental rating scheme, compared to private domestic firms. This is a clear and important insight with consequences for a number of issues, such as understanding the pollution haven debate. Also, firms located in densely populated regions, particularly in Java, responded more positively to the public disclosure of PROPER ratings. The main observed effect was however given by the initial level of environmental performance of firms. Those firms that had bad environmental performance records felt pressure to improve, but if the initial abatement steps had already been taken, the incentives to improve further appeared to diminish.     

Unilateral disclosure of private information by a regulated firm

It is common practice for regulators to depend on regulated firms for self-monitoring and self-reporting in spite of incentives for misrepresentation. Our analysis provides some justification for such dependence. We study disclosure of information in a game theoretic model of regulation, in which both the regulator and the firm are players in the game. Instead of designing a regulation scheme that compels disclosure, we study unilateral disclosure in a given regulatory framework (a framework which we believe has counterparts in current regulatory practice). The results provide insight to informal relationships between firms and regulators. Because the game is a single period game, the informal relationship in which the disclosures occur cannot be attributed to the existence of reputations and long term relationships.     

Retroactive Liability or the Public Purse?

The article addresses the question of whether responsibility for pollution created in the past should be retroactively applied to firms, or if the costs of cleaning up existing pollution should be financed by the public. We show that making firms liable for retrospective environmental costs can weaken the incentive to take precautions against future environmental costs. This follows since public financing of these costs can lead to greater prospective risk deterrence by allowing firms to more fully internalize the costs of future environmental risks. However, an analysis of existing public financing approaches highlights a set of dangers associated with their practical use.