The Most Politically Popular Regulation Under Asymmetric Information

Choice of regulation is an important issue in policy making. In the environmental field, the polluting industries are faced with regulation and costly abatement. We discuss a choice between two elements – an emission cap and a penalty rate − as regulation instruments and analyze a situation in which both a regulator and the polluting industry seek to minimize their costs where emissions are uncertain. A regulator suggests a string of efficient policy pairs that minimize social costs, and an industry can then choose one of the efficient policies available in order to minimize compliance costs; hence, a regulator can determine the most politically feasible regulation and satisfy efficiency conditions at the same time. We show asymmetric expectations on uncertain emissions that affect the choice of the efficient and politically feasible policy. This paper aims to present a policy that satisfies both a regulator and a regulated party.