On Environmental Policy and Permitting


  • Philippe Bontems, INRA, Université de Toulouse I, Manufacture des Tabacs, Bât F., 31000 Toulouse, France (bontems@toulouse.inra.fr). Jean-Marc Bourgeon, INRA-INAPG, 16 rue Claude Bernard, 75005 Paris, France (bourgeon@u-paris10.fr).

  • We thank the editor and one referee for helpful comments. We also acknowledge financial support from the PIREE program of the French Ministry of the Environment.


The literature on environmental policy under adverse selection usually assumes that firms' profit vary monotonically with a private information parameter. However, it is easy to demonstrate using standard production setups that regularity is not the rule. We show that policy requirements are very sensitive to this assumption. In particular, the optimal instrument resembles more an “adaptable” pollution standard than the economic instrument of an environmental tax. We also show that permitting, which results in some firms overinvesting in pollution-control equipment, does not serve the objective of improving the environment but rather allows the agency to increase the proceeds of the policy.