Abstract:
This paper proposes a model where both regulator and industry behave strategically
to endogenously choose the optimal market instrument. The regulator
payoff function includes political gains from investment in abatement and
improvement in the provision of the environmental good in addition to the
efficient choice of the instrument level. Whereas the industry’s objective is to
minimize abatement costs. Under plausible conditions, the model suggests
that quantity instrument is favorable to the regulator. Also, industry with high
cost of abatement has a better incentive to invest in clean technology. Regulator
gains from increasing the provision of environmental good and from industry
investing in abatement.
