Theoretical and empirical examination of decentralized environmental regulation

Abstract

This dissertation closely examines the merits, weaknesses, and potential of decentralized environmental regulation. I examine three areas of particular concern in the structure of environmental regulation. In the first chapter, I examine how information problems resulting from incorrectly specified atmospheric models are likely to affect economic efficiency in a permit market. While permit markets have been heralded as a promising solution for controlling environmentally damaging emissions, there is no formal research linking the atmospheric model, which directly affects permit prices, with economic outcomes. In the chapter, I develop a generalized theoretical model that demonstrates the problems that are likely to arise when there is uncertainty in the underlying atmospheric parameter estimates. As it turns out, permit markets operating with incorrectly specified atmospheric models may result in large losses in economic efficiency, even if the permit market is operating ideally in an economic sense. The second chapter analyzes a much broader issue, that of state versus federal environmental regulation. The chapter focuses on the methods used by states attempting to control interstate water pollution in the Ohio Valley in the early 1900s. The time period was chosen to predate federal intervention into environmental regulation and, hence, allows for a clean test of how states might be expected to address difficult pollution problems under a system of state regulation. Using a simple game theoretic model, the paper explores interstate water pollution control compacts and their uses in addressing interstate water pollution. I find that states were able to overcome significant bargaining difficulties in formulating the compacts, which ultimately led to effective control of interstate water pollution. The final chapter focuses on voluntary overcompliance by firms facing environmental standards. The paper models environmental regulation according to the EPA's Best Available Control Technology (BACT). The model predicts voluntary overcompliance by firms as they attempt to raise the (endogenous) environmental standard and, in the process, raise their rivals' costs. The paper also demonstrates the merits of nonuniform environmental standards. In attempting to elicit efficient levels of R&D investment, the regulatory authority may discourage socially wasteful overinvestment in pollution technology through the use of nonuniform standards.