Regulation of Marine Contamination under Environmental Uncertainty: Shellfish Contamination in California

We develop a model of regulation of environmental risks in a heterogeneousindustry when policy makers are sensitive to uncertainties about the processes generating the risks. Optimal source reduction capacity is shown to vary according to site suitability. Optimal source reduction capacity and the implicit value of risk reduction increase as risk standards become more stringent and as aversion to uncertainty grows. Taxes are more equitable than standards whenever the emissions generating the risks are all-or-nothing.These results are illustrated for a case of public health regulation of dairy wastes producing enhanced risk of acute gastroenteritis through contaminationof a shellfishery. Aversion to uncertainty influences investment in pollutioncontrol substantially. The premium in pollution control costs imposed by anincrease in the required margin of safety increases as aversion to uncertaintygrows and as the risk standard becomes more stringent, as do the implicit value of risk reduction and optimal tax. Taxes are more equitable than standards for lax risk standards but become less so as the risk standard becomes more stringent.