Investment Policy for New Environmental Monitoring Technologies to Manage Stock Externalities

With the development of modern information technologies, relying on nanotechnologies and remote sensing, a number of systems can be envisaged that allow for monitoring of the negative externalities generated by producers, consumers or travelers - road pricing schemes or individual emission meters for automobiles are two examples. In the paper, we analyze a dynamic model of stock pollution when the regulator has incomplete information on emissions generated by heterogeneous agent. The paper's contribution is to explicitly study a decentralized policy for adoption of monitoring equipment over time. Each agent has to choose between paying a fixed fee or installing monitoring technology and paying a tax on actual emissions. We determine the second-best tax rates, the pattern of monitoring technology adoption, and identify conditions for the voluntary diffusion of monitoring technologies over time.