Environmental regulation with technology adoption, learning and strategic behavior

Nori Tarui, Stephen Polasky

Research output: Contribution to journalArticlepeer-review

52 Scopus citations

Abstract

We analyze a model of environmental regulation with learning about environmental damages and endogenous choice of emissions abatement technology by a polluting firm. We compare environmental policy under discretion, in which policy is updated upon learning new information, versus under rules, in which policy is not updated. When investment in abatement technology is made prior to the resolution of uncertainty, neither discretion nor rules with either taxes or standards achieve an efficient solution except in special cases. When there is little uncertainty, rules are superior to discretion because discretionary policy gives the firm an incentive to distort investment in order to influence future regulation. However, when uncertainty is large, discretion is superior to rules because it allows regulation to incorporate new information. Taxes are superior to standards under discretion regardless of the relative slopes of marginal costs and marginal damages for the case of quadratic abatement costs and damages.

Original languageEnglish (US)
Pages (from-to)447-467
Number of pages21
JournalJournal of Environmental Economics and Management
Volume50
Issue number3
DOIs
StatePublished - Nov 1 2005

Keywords

  • Emissions taxes and standards
  • Environmental regulation
  • Rules versus discretion
  • Technology adoption

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