Pollution Standards, Technology Investment and Fines for Non-Compliance

Is it socially desirable that .nes for exceeding pollution standards depend on the degree of non-compliance and also on the .rm.s level of investment in environmentally friendly technologies? We consider a representative .rm that chooses the pollution level and the investment e¤ort in response to a pollution standard, an inspection probability and a .ne for non-compliance. The .ne should not depend on the .rm.s investment e¤ort if the optimal policy induces compliance. However, the .ne should strictly decrease with investment e¤ort under non-compliance. The optimal .ne considers the relative importance of monitoring and sanctioning costs in the enforcement problem