Emission Standards and Monitoring Strategies in a Hierarchical Setting

In this paper, we consider a hierarchical model of environmental regulation and enforcement to study the standard setting decision made by a national regulator and the monitoring decision made by a local enforcement agency. The problem is interesting due to differences in both available information and objectives at local and national levels. Generally, the national regulator is less informed than the local agency about the characteristics of the polluting agents. This leads to the use of uniform standards and the delegation of the enforcement activity to the local agency. On the one hand, the local agency partially corrects for the inefficiency caused by uniform standards by setting a differentiated inspection strategy. On the other hand, the level of the standard is distorted to partially correct for the inefficiency caused by the divergence between national and local objectives. The interactions between local and national decisions are influenced by the size of the divergence in objectives and the level of environmental damages.