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 firm's costs of meeting the standard. The relationship between initial and continuing compliance is analyzed, the curvature of isoabatement 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. AM's comparison of pollution taxes versus pollution standards fails to hold up under the modified assumption on fines. (C) 2000 Academic Press.