An optimal enforcement system for pollution control: monetary penalties and suspension orders

Abstract

We analyzed an optimal enforcement system of monetary penalty and suspension order for social welfare maximization under a constraint of pollution control. We showed that when there is an asymmetrical information problem regarding firms’ pollution control efforts, both enforcement tools are generally needed. Taking as a benchmark a situation where firms voluntarily engage in pollution control activities, we found that when the profit level is high, the suspension order is more effective than the monetary penalty because the firms are eager to stay in business to earn high profit. On the other hand, if the profit level is low, the regulator must resort to a less severe suspension order, thereby lowering the number of firms fined.