Emissions Standards and Ambient Environmental Quality Standards with Stochastic Environmental Services Stephen F. Hamilton ∗ Cal Poly San Luis Obispo Till Requate † University of Kiel May 8, 2012 Abstract Many important environmental policies involve some combination of emission controls and ambient environmental quality standards, for in- stance 2 emissions are capped under Title IV of the U.S. Clean Air Act Amendments while ambient  2 concentrations are limited under National Ambient Air Quality Standards (NAAQS). This paper examines the relative performance of emissions standards and ambient standards when the natural environment provides stochastic environmental services for assimilating pollution. For receiving media characterized by greater dispersion in the distribution of environmental services, the optimal emis- sions policy becomes more stringent, whereas the optimal ambient policy generally becomes more lax. In terms of economic performance, emissions policies are superior to ambient policies for relatively non-toxic pollutants, whereas ambient standards welfare dominate emissions standards for suf- ficiently toxic pollutants. In the case of combined policies that jointly implement emissions standards and ambient standards, we show that the optimal level of each standard relaxes relative to its counterpart in a uni- lateral policy, allowing for greater emissions levels and higher pollution concentrations in the environmental medium. JEL Classification : D62; Q38; Q50 Keywords : Environmental policy; ambient standards; emissions standards ∗ Correspondence to: S. Hamilton, Department of Economics, Orfalea College of Business, California Polytechnic State University, San Luis Obispo, CA 93407. Voice: (805) 756-2555, Fax: (805) 756-1473, email: shamilto@calpoly.edu. We would like to thank Robert Innes, David Sunding, Cyrus Ramezani and seminar participants at UC Berkeley, UC Davis, and the University of Kiel for helpful comments. † Department of Economics, University of Kiel, Olshausenstrasse 40, 24118 Kiel, Germany, email: requate@bwl.uni-kiel.de.