Taxing a Polluting Monopoly with Private Information

Firms have usually more information about their technology than third parties, and this may be used opportunistically. This book examines how a regulator can mitigate the potential opportunistic behaviour of a polluting monopolist, when imposing taxes in a context of asymmetric information about the firm’s production and emissions technology. A two-period dynamic signalling model is used in which the asymmetric information problem is resolved when production and emissions levels are publicly observed at the beginning of the second period. Results were found that highlight that whenever the regulator’s environmental conscience is sufficiently high, the monopolist wishes to be perceived as a firm that pollutes a low amount. As a reaction, the regulator better aligns its incentives with those of the polluting firm by charging a tax not higher than that imposed, in expected terms, under the context of symmetric information.