Dynamic regulation of nonpoint source pollution when the number of emitters is large
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When a nonpoint source pollution process involves many polluters,
each taking his own contribution to aggregate pollution to be negligible, ambient-based policies become ineffective due to lack of strategic
interactions between dischargers. We offer a regulation mechanism for
this case. The mechanism consists of inter-period and intra-period components. The first exploits ambient (aggregate) information to derive
the optimal pollution and aggregate emission processes and the ensuing
social price of emission. The intra-period mechanism takes as given the
social price of emission and implements the optimal output-abatement-emission allocation across the heterogenous, privately informed firms
in each time period. The mechanism gives rise to the full information
outcome when the social cost of transfers is nil. A positive social cost
of transfers decreases both output and abatement in each time period, though the effect on emission is ambiguous.