Working Paper BETA #2010-07

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Title : Adverse Selection, Emission Permits and Optimal Price Differentiation.

Author(s) : Mourad Afif, Sandrine Spaeter

Abstract : In this paper, we focus on the adverse selection issue that prevails in an economy when the regulator is not able to observe the type of the abate- ment costs of the firms. The regulator decides the total level of emission that minimizes the total social cost and he sells them to the firms at some di¤erentiated prices. When firms can hide their type relative to their true abatement costs, prices must not only minimize the social cost of the envir- onmental policy. They must also induce the firms to reveal their true type. A striking point of our model is that there is no participation constraint for firms are compelled to be actors of the environmental policy. Another original result concerns the rent, which still benefits to low-cost types, but which appears to be a fee paid by high-cost types.

Key-words : Regulation; adverse selection; emission permits; abatement costs; price differentiation.

JEL Classification : D82; H23; Q52.