April 11, 2019, 13:30–14:15
Manufacture des Tabacs
Room MS001
TSE internal seminars
Abstract
We investigate the design of a pollution standard when the firms’ abatement costs are unknown and emissions are also taxed. A firm might abate beyond what is required by the standard by equalizing their marginal abatement costs to the tax rate, thereby revealing information about its abatement cost. We analyze how a regulator can take advantage of this information to update the standard. If high enough, the tax is used as a separating device: the standard is relaxed to induce informational revelation. Updating standards generates a ratchet effect: the standard becomes more stringent for a low-cost firm, which therefore might prefer to hide its cost by under-abating. We identify conditions on the tax rate for the separating equilibrium with information acquisition to arise. Our analysis is illustrated with the case of NOx regulation of stationary pollution sources in Sweden.