ABSTRACT
Regulation of prices and pollution for a monopolist with private information is considered with a focus on the relative efficiency of standard-setting and emissions taxation approaches to pollution control. With incomplete information, emissions taxation is a dominated regulatory instrument for abatement purposes because it generates information costs that can be avoided when an abatement standard and prices are set by the regulator. A regulator has a number of approaches that it could use to control emissions. The approach most frequently employed is a command-and-control, or standard-setting, approach in which a technology or abatement standard is mandated. When, however, information is asymmetrically distributed with the firm better-informed than the regulator about the cost and effectiveness of the abatement technology when applied to its particular production process, standard-setting and the regulation of prices is a sufficient regulatory instrument for abatement purposes. The comparison of the optimal output and standard with the first-best solution is ambiguous in general.
