Policy for the adoption of new environmental monitoring technologies to manage stock externalities

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.