Ambient environmental inspections eliminate the need for marginal deterrence

We consider the enforcement of an environmental standard if the polluters can choose between two levels of noncompliance. The probabilities of inspection are determined autonomously by an inspection agency who permanently monitors ambient pollution. We show that this monitoring creates strategic interactions between polluters, which imply that the probability of inspection is increasing in the transgression level. On the other hand, these strategic interactions also imply that in most cases, the equilibrium does not depend on the differentiation of the fine structure; we thus do not find that penalties should be differentiated to obtain marginal deterrence.