Voluntary Agreements and Non-Verifiable Emissions

If pollution is observable, but some emissions cannot be verified by court,voluntary agreements between a regulator and an industry may bewelfare-improving compared to second-best emission taxes. Such agreementsdiffer from direct regulation in a non-trivial way. The first-best optimummay be included in the set of possible agreements, even if it is notattainable using tax instruments. The non-verifiability may, for example, beassociated with delimitation problems in defining the pollution tax base.