Abstract:
In this paper, we analyze whether it is socially desirable that fines for exceeding pollution standards depend not only on the degree of non-compliance but also on technolog investment efforts by the polluting firms. For that purpose, we consider a partial equi-librium framework where a representative firm chooses the investment effort and the pollution level in response to an environmental policy composed of a pollution standard, aninspection probability and a fine for non-compliance. We find that the fine should strictly decrease with the investment effort when (i) there are administrative costs of sanctioning; (ii) the optimal policy induces non-compliance; and (iii) either the fine is sufficiently convex in the degree of non-compliance or the investment effort decreases marginal abatement costs significantly