Determine whether an emission fee or an emission permit

Reference no: EM13191352

Consider the case of a regulator and a single polluter. Suppose the regulator knows the marginal damage from pollution but is unsure about the firms marginal savings from emitting. The regulator asks the firm to reveal its marginal savings from emitting schedule. Regulators know that if they use an emission fee, the firm has an incentive to lie about its marginal savings. Regulators also know that if they use a permit system, lying may still result. So the regulator announces that after being told the firm's marginal savings, the regulator will flip a coin to determine whether an emission fee or an emission permit will be used to control pollution. In this case, will the firm have an incentive to truthfully reveal its marginal saving from emissions? Why or why not?

Reference no: EM13191352

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