| Abstract: |
We model firm and regulator behavior to examine theoretically the use and
consequences of discretionary exemptions (also known as variances, waivers, or
exceptions) in environmental regulation. Many laws, such as the Clean Water
Act, impose limits on harmful activities yet include ``safety valve''
provisions giving the regulator discretion to grant full or partial exemptions
that provide permanent or temporary relief. This discretion begets flexibility
over the law’s de facto stringency. Our model places a profit-maximizing
pollution discharger under the purview of a fully informed regulator who
imposes discharge limits. We show that when a regulation is otherwise
inflexible, an exemption that relaxes the limit for high cost firms can
improve social welfare by reducing the costs of achieving a level of
environmental quality. We further demonstrate that if abatement technology
improves in effectiveness over time, a temporary exemption can increase social
welfare by adjusting abatement in response to dynamic conditions. We also show
that if the labor market is sticky, exemptions can ``create jobs.'' If a
regulator is driven by an unequally weighted social welfare function, she can
use exemptions to meet redistributive ends. However, these beneficial impacts
of exemptions rely on a fully informed and benevolent regulator; otherwise,
the discretionary nature of exemptions leaves them open to abuse. A regulator
who is captured by industry, focused only on her jurisdiction, or answerable
to a set of elites can abuse exemptions in ways that reduce social welfare,
such as allowing inefficiently high pollution or inducing a cost-ineffective
pattern of abatement. |