Input Substitution and Pollution Control under Uncertainty and Firm Heterogeneity

Much research has focused on emission-based instruments for pollution control, but indirect approaches that control input use or production technologies are often used. This article derives a simple rule for evaluating the relative efficiency of input-use taxes and standards in the presence of input substitution, firm heterogeneity, and uncertainty. The importance of input substitution is demonstrated and the key parameters that determine the relative efficiency are identified.