CHALLENGING THE ENFORCEMENT OF ENVIRONMENTAL-REGULATION

If a firm can contest the enforcement of an environmental regulation, neither increasing the probability nor severity of the fine will guara ntee a reduction in a firm's illegally dumped waste. A policy that can unambiguously decrease illegal dumping is lowering the cost of legal disposal. This result occurs because the use of monitoring and fines t o increase the probability or severity of enforcement triggers investm ent to evade enforcement, while a decrease in the costs of legal dispo sal does not. Investment in the resources to evade enforcement decreas es the attractiveness of monitoring by significantly increasing the co sts of environmental audits, administrative hearings, and judicial pro cedures. This occurs even with a high degree of regulator information about the firm's cost structure and no monitoring errors. In addition, if the regulator can only imperfectly monitor a firm's behavior so th e firm can be accused of another firm's behavior, observable commitmen t to challenge enforcement will lead to overinvestment in resources to evade enforcement, an increased level of illegal dumping, and an over all increase in total costs relative to the unobservable cass.