Stimulating Mechanisms in Ecologically Motivated Regulation: Will Ecological Policies in Transition and Developing Countries Become Efficient?

In this paper, the theory of stimulating mechanisms is used to study the relationship between characteristics of polluting firms and results of ecological policy. It is shown that the optimal ecologically motivated policy can qualitatively change in accordance with a relative effectiveness of types of firms. Two models are proposed. In the first of them the regulator has no information on a type of firm but possesses information about cost functions of the types of firms. In the second (game) model, moreover, the regulator has no information about levels of investment chosen by the types of firms.