Optimal Fines for Environmental Noncompliance Under a Decentralized Enforcement Policy

We consider the determination of the optimal fine for noncompliance by a legislator who anticipates the inspection game between an autonomous inspection agency and polluting firms. This agency can make the inspection of individual firms contingent on ambient pollution. The agency's autonomy implies that it cannot commit itself to announced inspection probabilities. If the legislator centralizes the decision to monitor ambient pollution, the optimal fine is infinitely large. The legislator can then forbid ambient inspections to avoid overenforcement. If the legislator decentralizes the decision to monitor ambient pollution, overenforcement can be avoided by choosing a finite fine.