A policy of effective environmental protection, in the present political at
mosphere, will require low-cost monitoring and enforcement (M&E) strategies
that do not rely on draconian penalties. Infinite or even very high penalt
ies for environmental violations are socially and politically unacceptable.
Environmental violations are often classed as civil offenses, and the occu
rrence of a violation may be thought insufficient to establish intent. If p
enalties are upper-bounded and each firm is inspected randomly, compliance
cannot be maintained with arbitrarily small inspection probabilities and, h
ence, small agency costs. In this paper we examine possibilities for reduci
ng agency M&E costs, including the requirement for self-reports of effluent
s and the adjustment of the inspection probability to reflect a firm's comp
liance or reporting reputation.