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European Review of Agricultural Economics vol. 30 no. 4 © Oxford University Press and Foundation for the European Review of Agricultural Economics 2003; all rights reserved

Environmental standard setting by a supra-regional authority: customisation or convergence?

Michel Cavagnac

University of Limoges, GREMAQ and LEERNA, Toulouse 1, France

Corresponding author: Michel Cavagnac, Université des Sciences Sociales, Manufacture des Tabacs—Bât. F, 21 Allée de Brienne, 31000 Toulouse Cedex, France. E-mail: Michel.Cavagnac{at}univ-tlse1.fr

Received July 2002; Revision received September 2003.

Summary

The paper studies the fixing of environmental standards by a supra-regional (e.g. European) authority when regional authorities have private information about local conditions. Institutionally, the standard-setting body is not authorised to levy taxes on the regions. We show that the elicitation of private information may require weaker environmental standards (i.e. higher pollution allowances) than the first-best solution. In this case, the social cost of the informational rent left to the region, in the form of increased pollution, can be such that bunching is optimal (the standards are less closely customised to region-specific conditions). In the extreme, the informational cost can be such that it is optimal to disregard the regional characteristics and to require convergence.

Keywords: regulation, environmental standards, regional characteristics, adverse selection, discriminatory pollution permits

JEL classification: D82, K32, Q28


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