Policy for the adoption of new environmental monitoring technologies to manage stock externalities $ Katrin Millock a,n , Angels Xabadia b , David Zilberman c a Paris School of Economics, CNRS, Universite´ Paris 1 Panthe ´on-Sorbonne, Centre d’Economie de la Sorbonne, 106/112 Boulevard de l’Hˆ opital, 75647 Paris Cedex 13, France b Department of Economics, University of Girona, Campus de Montilivi, 17071 Girona, Spain c Department of Agricultural and Resource Economics, 207 Giannini Hall, University of California, Berkeley, CA 94705, USA article info Article history: Received 23 March 2010 Available online 31 March 2012 Keywords: Externalities Environmental taxation Monitoring technology adoption Diffusion Nanotechnologies Stock pollution abstract With the development of modern information technologies, relying on nanotechnologies and remote sensing, a number of systems can be envisaged that allow for monitoring of the negative externalities generated by producers, consumers or travelers—road pricing schemes or individual emission meters for automobiles are two examples. We analyze a dynamic model of stock pollution when the regulator has incomplete information on emissions generated by heterogeneous agents. Our contribution is to explicitly study a decentralized policy for adoption of monitoring equipment over time. We determine the second-best tax rates, the pattern of monitoring technology adoption, and identify conditions for the voluntary diffusion of monitoring technologies over time. Simulations show the welfare gains compared to alternative policies. & 2012 Elsevier Inc. All rights reserved. 1. Introduction Some of the major environmental problems of our time are stock externality problems, including contamination of water bodies by accumulating salt and chemicals, climate change, other air pollution problems where accumulating pollutants damage health or property, deforestation and loss of biodiversity. Frequently, the damaging activities cannot easily be attributed to individual agents, which is a challenge to policy making. However, applications of new technologies including computers and the internet, wireless telephony, remote sensing, and geographic information systems, enable the introduction of increased numbers of monitoring systems to identify externality sources. In some cases, e.g., road pricing in Singapore, we already see instantaneous monitoring of road use that generates negative externalities (congestion and air pollution). The new technologies may require large investment in infrastructure, as well as in individual units of equipment. While in some cases, individual agents may need to invest in new technologies, in others they may rent environmental monitoring equipment, 1 and in other situations polluters may subscribe to third-party monitoring services. Contents lists available at SciVerse ScienceDirect journal homepage: www.elsevier.com/locate/jeem Journal of Environmental Economics and Management 0095-0696/$ - see front matter & 2012 Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.jeem.2012.02.004 $ We thank the Editors and two anonymous reviewers for detailed comments that were very helpful in improving the paper. Angels Xabadia acknowledges financial support from the Ministerio de Ciencia e Innovacio ´ n (ECO2010-17020), and the Generalitat de Catalunya (XREPP, 2009SGR189). David Zilberman is member of the Giannini Foundation of Agricultural Economics. n Corresponding author. Fax: þ33 1 44 07 82 31. E-mail addresses: millock@univ-paris1.fr (K. Millock), angels.xabadia@udg.edu (A. Xabadia), zilber11@berkeley.edu (D. Zilberman). 1 For example, companies such as Enviro-Equipment, Inc (http://www.enviroequipment.com/), Ashtead technology (http://www.ashtead-technol ogy.com/us/), Satellite Imaging Corporation (http://www.satimagingcorp.com/services.html) and Fondriest Environmental (http://www.fondriest.com) rent either environmental monitoring equipment or monitoring services for various applications. Journal of Environmental Economics and Management 64 (2012) 102–116