Rousseau & Telle, 2010

Sandra Rousseau and Kjetil Telle, On the existence of the optimal fine for environmental crime, International Review for Law and Economics 2010, vol. 30(4), 329-337

Classical theory states that the optimal fine is the damage caused by the crime divided by the probability of detection. But does such an optimal fine exist? The paper focusses on emissions from production, and, even if it assumes that the damage function is perfectly known, it still shows that the optimal fine typically does not exist. Non-existence occurs as the environmental damage function is non-linear in overall emissions, meaning that there are interactions between emissions, the economy and the environment. The authors argue that these interactions cannot be accurately reflected in the fine imposed by the regulator in practice. Previous literature on optimal fines does not recognize the non-existence of the applicable optimal fine, basically since this literature uses discrete models where the damage caused by the crime is assumed constant. The papers result reduces the attractiveness of fines and may help explain enforcement agencies’ inclination towards non-monetary enforcement instruments.

Full publication here.