Improving compliance with environmental regulations: Targeted enforcement and self-audits

The resources available for the enforcement of environmental regulations are typically limited. By focusing attention on certain segments of the regulated community, and encouraging industry self-policing, enforcement agencies can more effectively use their limited resources. These two innovative approaches to enforcement, adopted by the United States Environmental Protection Agency (EPA), are examined in this thesis.; in Part 1, targeted monitoring and enforcement is considered. Firms are divided into two groups, with the enforcement agency concentrating its resources on firms in the target group. The agency chooses the inspection frequency and fine in each group, along with the transition structure by which firms move from one group to the other. Firms in the non-target group are not inspected, but are moved at random into the target group. In the target group, inspection occurs with some positive probability, and when found in violation, the firm is assessed the maximum fine possible. Escape from the target group occurs only when an inspection reveals the firm is in compliance. This scheme creates an additional reward for compliance, reducing the required inspection frequency compared to a scheme with simple random escape. The range of parameter values for which this optimal solution is feasible, however, is limited. Past compliance targeting, where firms with a history of violation are moved to the target group, is considered as an alternative.; In Part II, the EPA's “audit policy” is examined. This policy, designed to encourage industry self-policing, was introduced in December 1995 and authorizes reduced penalties for firms that voluntarily conduct self-audits and report any discovered violations to the EPA. To be eligible, the firm must also correct the violation. A simple model is developed to explore the effect of penalty mitigation on the firm's incentive to undertake self-audits. It is shown that full penalty mitigation should be granted to firms that audit, and then correct and report any violations. No penalty relief should be granted to firms that simply conduct a self-audit, but fail to take any further action.