CHALLENGING THE ENFORCEMENT OF ENVIRONMENTAL-REGULATION

If a firm can contest the enforcement of an environmental regulation, neither increasing the probability nor severity of the fine will guarantee a reduction in a firm's illegally dumped waste. A policy that can unambiguously decrease illegal dumping is lowering the cost of legal disposal. This result occurs because the use of monitoring and fines to increase the probability or severity of enforcement triggers investment to evade enforcement, while a decrease in the costs of legal disposal does not. Investment in the resources to evade enforcement decreases the attractiveness of monitoring by significantly increasing the costs of environmental audits, administrative hearings, and judicial procedures. This occurs even with a high degree of regulator information about the firm's cost structure and no monitoring errors. In addition, if the regulator can only imperfectly monitor a firm's behavior so the firm can be accused of another firm's behavior, observable commitment to challenge enforcement will lead to overinvestment in resources to evade enforcement, an increased level of illegal dumping, and an overall increase in total costs relative to the unobservable cass.