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Economic Incentive Policies Under Uncertainty: The Case of Vehicle Emissions Fees
Winston Harrington, Virginia D. McConnell, Anna Alberini
RFF Discussion Paper 96-32 | August 1996
The paper compares policy alternatives for reducing vehicle emissions when there is uncertainty in the ability of existing emissions tests to identify a vehicle's true emissions rates and also in the ability to predict the effectiveness of repair. Using a simulation model, we compare the cases of a command and control type of policy, like a vehicle inspection program which requires the repair of all failing vehicles, to emissions fee policies which give motorists choice about whether to repair their vehicles. We find that even under uncertainty, fees are more efficient than the command and control policy. We do find, however, that uncertainty has a large impact on the costs and emissions reduction potential of both policies. In addition, we find that uncertainty can have important impacts on the evaluation of fee alternatives. Under uncertainty, a fee which only has to be paid after emissions reach some limit, are found to be as efficient as pure fees but have the advantage of mitigating the high costs of fees to motorists. Maximum fees with repair subsidies are also we also examined and are found to have both efficiency and distributional advantages, but are likely to face incentive and implementation problems.
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