ENVIRONMENTAL-POLICY UNDER IMPERFECT INFORMATION - INCENTIVES AND MORAL HAZARD

When net emissions of individual polluters cannot be efficiently monitored, then emissions charges, controls on emissions levels, or subsidies for emissions reduction are not effective as environmental policy instruments. This paper proposes instruments that can be applied in such limited information situations. These instruments take the form of contracts between a pollution control agency and individual polluters. The contracts include a combination of fines and subsidies that induces dischargers to follow optimal environmental policies in the absence of individual monitoring. © 1991.