Lecture 14 is given by Professor Stefan Ambec, Co-editor of Environmental and Resource Economics Research Director at INRA, Toulouse, who has a background in microeconomics. He has given three lectures and in this first one he discusses the topics of “choice of policy instruments” and “asymmetric information”, an example of the later is when the cost of abatement is unknown to the regulator but the firm(s) knows about their own abatement costs.
In the lecture he assumes that there can be a “regulator”, someone in charge of designing and enforcing a certain regulation, but normally for trans border pollution there are no supranational authority that has this power. Surely there are international organizations like the European Union who can deal with pollution but still the power is limited. Often there are international agreements to deal with similar problems. So how do you design these agreements?
In his lectures Professor Ambec uses microeconomic theory and game theory to address the problem given in the previous paragraph. He discusses the economic intuition behind and which policy instruments to use and the microeconomic reasons for this.
He then presents the model where he assumes two agents; one polluting agent and one victim of pollution. He discusses the situation of asymmetric information and the optimum under such conditions. The regulator who wants to minimize the social cost of pollution and the firm who wants as small costs as possible. Since the regulator doesn´t know the exact cost they calculate the expected cost. He compares low cost and high cost firms.
In this setting Ambec compares regulations based on taxes and caps. And shows how high cost firms and low cost firms would be affected respectively.