Initial and Continuing Compliance and the Trade-Off between Monitoring and Control Cost

The trade-off between firm abatement costs and regulatory monitoring costs modeled by Amacher and Malik [[1], [2]] (AM) is reinterpreted, extended, and critiqued in part. The notion of technology is replaced with the quantity of abatement capital, and a constant fine per unit is replaced with a “lump-sum” maximum total fine. Analysis of first- and second-best regulatory situations indicate that the first-best allocation involves a higher capital-to-labor ratio than that which would minimize the firmʹs costs of meeting the standard. The relationship between initial and continuing compliance is analyzed, the curvature of iso-abatement curves is related to the extent of net cost-saving possible from more capital-intensive abatement, and the effect of a delayed commitment to the pollution standard by the regulator is considered. AMʹs comparison of pollution taxes versus pollution standards fails to hold up under the modified assumption on fines.