Environmental regulation by private contest

It is widely expected that the recent trend (in the US, EU and elsewhere) towards an increased role for private agents and agencies in the formulation and enforcement of environmental regulation will continue. If environmental regulation is to be "privatised" in this way it is natural to ask how far the activities of environmental groups, on whose shoulders much of the responsibility for defending the environment is likely to fall, should be subsidised or taxed. In this paper we identify the trade-offs involved and characterise the optimal subsidy/tax. The analysis is argued to have significant implications for how governments should think about the way in which fiscal law treats environmental NGO's.