Optimal rewards for economic regulation
The author determines which revenue schedule, when applied by economic regulation to production units, will result in an optimum response. He points out that regulations must be stable for a long-enough period to be taken seriously by a firm, although they should not be considered to be immutable, and that good regulatory strategy encourages cheap firms to produce more and expensive firms to produce less. A model framework is described for determining optimal revenue function and the various dependency factors are characterized. Two components, the traditional price signal and a penalty for departure from the quantity target, comprise the optimal reward function, which means that it is not redundant for economic planners to set both prices and production quotas. This analysis can be applied to environmental economics in terms of effluent standards.
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