1. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc. C H A P T E R 15 REGULATION WITH UNKNOWN CONTROL COSTS

2. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc.

3. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc. FIGURE 15.2 Finding the optimal reward for truth telling

4. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc.

5. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc. FIGURE 15.4 Losses if firm is high cost. MD(e), marginal damage from emissions; MS H (e), marginal savings from emitting if firm is high cost; e*, p*, optimal quantity and price regulations; e**, optimal emissions if firm is known to be high cost; e H, emissions from fee p*.

6. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc. FIGURE 15.5 (a,b) Welfare losses from price and quantity control. MD(e), marginal damage from emissions; MS H (e),MS L (e), marginal savings from emitting for high (H)- and low (L)-cost firms; e*, p*, optimal quantity and price regulations; light shaded area, inefficiency from emission fee; dark shaded area, inefficiency from quantity control.

7. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc. FIGURE 15.6 Three damage functions and their marginals. T*, threshold; D 1,MD 1, linear damage, constant marginal damage; D 2,MD 2, quadratic damage, linear marginal damage; D 3,MD 3, highly curved damage (and thus marginal damage) in vicinity of threshold, T*.

8. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc. FIGURE 15.7 Permit system with penalty for overemitting and subsidy for under-emitting. MD(e), marginal damage from emissions; MS H (e), MS(e), MS L (e), marginal savings from emitting: high-cost, average, low-cost assumptions; e*, level of permit issuance; s, subsidy rate for underemitting; e L > emission rate if firm is low cost; p, penalty rate for overemitting; e H, emission rate if firm is high cost.

9. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc.

10. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc.

11. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc.