Regulation of Non-Point Emissions – A Variance Based Mechanism

Non-point emission problems such as pesticide, nitrate, and phosphorus pollution of lakes and ground water are often characterised by a small number of polluters, convex damage functions, and stochastic emissions. Some regulatory mechanisms proposed in the literature for stochastic non-point emissions implement the optimal abatement vector in dominant strategies (ensuring that non-Nash conjectures cannot be rationalized). However, specification of these mechanisms requires firm level information and differentiated rates when the damage function is convex. Other mechanisms eliminate the need for firm level information and rate differentiation, but only implement optimum in Nash strategies (where non-Nash conjectures, that cause equilibrium to stray from optimum, can be rationalized). In this paper we propose a mechanism which eliminates the need for firm level information and rate differentiation, while retaining implementation in dominant strategies. Copyright Kluwer Academic Publishers 2002