Optimal Design of a Politically Feasible Environmental Regulation

Abstract

This paper discusses the optimal environmental regulation model that considers the political support of the regulated agents. We suggest a hybrid emission control policy pair, which combines a price (penalty) and a quantity control (emissions cap), and is efficient from the regulator's perspective. Regulated companies choose one of the lowest-cost policy options within the pool of efficient hybrid policy pairs, and the regulator also prefers the most popular policy option with the smallest political resistance from the industry. This theoretic analysis provides an opportunity for policymakers to design acceptable regulation structures.