Does an Optimal Voluntary Approach Flexibly and Efficiently Control Emissions from Heterogeneous Firms?

We theoretically examine voluntary policies' potential for controlling emissions from a large number of heterogeneous rms under an asymmetric information case as well as the exibility of the optimal voluntary policy. The potential of exible voluntary policies depends on the type of heterogeneity, distribution of rms and possibility of failure in introduction of inexible mandatory regulation. If heterogeneity of emission abatement costs results from firms' technology level and there are few low technology rms, there is likely to be a exible voluntary policy that generates higher social welfare than the inexible mandatory regulation. However, an inexible voluntary policy is the best among the feasible voluntary policies if there are more higher abatement cost rms than lower abatement cost rms. Moreover, no voluntary policy can generate higher social welfare than inexible mandatory regulation if heterogeneity of emission abatement costs results from rms' emission size, there are many small emission size rms, some medium emission size rms and a few large emission size rms, and the introduction of the inexible mandatory regulation can fail.