Optimal Enforcement Policy and Firms' Emissions and Compliance with Environmental Taxes

Abstract

In a market where firms with different characteristics decide upon both the level of emissions and their reports, we study the optimal audit policy for an enforcement agency whose objective is to minimize the level of emissions. We show that it is optimal to devote the resources primarily to the easiest-to-monitor firms and to those firms that value pollution the less. Moreover, unless the budget for monitoring is very large, there are always firms that do not comply with the environmental objective and others that do comply; but all of them evade the environmental taxes.

Environmental effectiveness of tax compliance policy in the presence of labor unions

“…Papers by Macho-Stadler and Pérez-Castrillo (2006) and Cheng and Lai (2012) are in close agreement with our work. Macho-Stadler and Pérez-Castrillo (2006) analyze the optimal enforcement policy and its effect on pollution emissions but abstract from the labor union.…”

“…Papers by Macho-Stadler and Pérez-Castrillo (2006) and Cheng and Lai (2012) are in close agreement with our work. Macho-Stadler and Pérez-Castrillo (2006) analyze the optimal enforcement policy and its effect on pollution emissions but abstract from the labor union. Cheng and Lai (2012) show that a stricter enforcement policy exerts indirect influence on pollution emissions by putting greater political pressure to reduce the pollution tax rate.…”

“…Greenberg (1984), Harrington (1988), Kambhu (1989), Andreoni (1991), Nowell and Shogren (1994), Heyes (1996, 2002), and Raymond (2004) find that, in the presence of dynamic frameworks, setting penalties below the maximal level can mitigate the detriment of the environment. Macho‐Stadler and Pérez‐Castrillo (2006) find that plants’ actual pollution first decreases and then increases to a higher level as enforcement becomes more stringent. Cheng and Lai (2012) state that a stricter enforcement policy decreases the expected profit of the polluters, who exert greater political pressure to reduce the pollution tax rate, resulting in more pollution emissions 2…”