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? Adverse Selection, Emission Permits And Optimal Price Differentiation ?

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Executive Summary

In this paper, the authors focus on the adverse selection issue that prevails in an economy when the regulator is not able to observe the type of the abatement costs of the firms. The regulator decides the total level of emission that minimizes the total social cost and he sells them to the firms at some differentiated prices. When firms can hide their type relative to their true abatement costs, prices must not only minimize the social cost of the environmental policy. They must also induce the firms to reveal their true type. A striking point of the model is that there is no participation constraint for firms compelled to be actors of the environmental policy.

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