The impact of information and cost heterogeneity on firm behaviour under an ambient tax/subsidy instrument

This study investigates whether the information individuals have about the number of other polluters and their payoffs affects how they make their decisions under an ambient pollution instrument. A number of papers show that although these instruments are able to induce groups to the target outcome, they are not able to induce individuals to make socially optimal decisions in a number of different controlled laboratory experiments. The results show that reducing information does not reduce the ability of ambient pollution instruments to induce groups to the optimal level of emissions. However, particularly with less information, this masks inefficiencies which are due to non-optimal decision making. We conclude with support for the contention that these instruments may only be useful in specific situations with homogeneous polluters who have good information about each other.