REGULATING AN EXTERNALITY-GENERATING PUBLIC UTILITY - A MULTIDIMENSIONAL SCREENING APPROACH

In this paper, I present a monopoly screening model in which a firm ho lds private information on fixed abatement costs. Because of the natur e of the optimal contracts, bunching is never optimal even with 'n' di stinct types. A characterization of full and limited information solut ions is offered and it is shown that the design standards alone determ ine the value of an information rent. The variable charge is completel y free of any marginal information costs. This allows the variable cha rge to track marginal damages and thereby ensures that marginal social costs are covered. A fixed charge implements the optimal solution.