Abstract
This paper analyzes and compares behaviors of regulators and polluting firms in emission tax systems with and without commitment to monitoring. In the commitment case, firms can be compliant or non-compliant at equilibria. Firms’ compliance implies that regulators will face the paradox of ex ante commitment to monitoring. However, we find that the commitment system is at least as efficient as the no-commitment system. This suggests that the commitment system has merit even the paradox of ex ante commitment may exist. Finally, relative magnitudes of firms’ optimal and reported emissions in the two systems are uncertain, unless their weights in the social cost function are greater than or equal to one. Relative values of equilibrium monitoring probabilities and fines in the two systems are also unsure.
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