The cost efficiency of voluntary agreements for regulating industrial pollution: A Coasean approach

This paper deals with the cost efficiency of target-based voluntary agreements for reducing industrial pollution. These agreements are contracts between a public body and an industrial association including the collective commitment of the industrial sector to reach a pollution abatement objective. In this respect, cost efficiency properties of these VAs are determined by the way burden sharing is carried out between individual firms at the implementation stage of the contract. To address this question, we develop a Coasean (neo-institutional) model which assesses the ability of the VA's burden sharing scheme based on inter-firm bargaining to minimise transaction costs. In a first part, we present the nature of the problem and discuss why a Coasean approach is suitable to deal with our question. In the next two parts, the analytical framework is presented. The assessment is carried out in the last part. In comparison with economic instruments and command and control approaches, we show that VAs are cost efficient in the following context: very large shared uncertainty about pollution abatement techniques, concentrated industrial sectors in which the heterogeneity in pollution abatement activities and costs is low.