Cutting environmental penalties to protect the environment

When pollutants are 'persistent' and the polluter has private information regarding the occurrence of accidental releases and the cost of clean-up, we show that the penalty regime which most effectively protects the environment will involve penalties which are less than maximal. The extent to which these penalties will be less than maximal is, interestingly, a non-monotonic function of the persistence of the hazardous substance being handled, with the highest penalties being appropriate in the case of pollutants of 'medium' persistence. Our analysis complements existing work which predicts that setting the penalties faced by some classes of violator below their maximal level may be compliance-enhancing, see, for example, Harrington (Journal of Public Economics, 1988, 37, 29-53); Greenberg (Journal of Economic Theory, 1984, 32, 1-13); Kambhu (Journal of Regulatory Economics, 1989, 1, 103-114).