Environmental Regulation in Vertically Coordinated Industries (original) (raw)
Many notable pollution problems occur in industries where production is carried out under vertical coordination arrangements that are characterized by conditions of double moral hazard. In contrast to situations characterized by full information, we show that standard prescriptions of environmental economics do not apply. Imposing a Pigouvian tax equal to the marginal cost of pollution does not lead to the first best level of pollution. The equilibrium levels of production and pollution are not independent of which agent is taxed. Making either agent or the industry as a whole financially liable for full environmental damage at the margin similarly does not lead to a first best level of pollution. On the contrary, under conditions of double moral hazard, the industry should pay for less than the full cost of environmental damage. At present, only one agent (if any) is typically liable for environmental damage. We derive conditions under which imposing new regulations that make only ...
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