Nonpoint Source Pollution, Asymmetric Information, and Output Regulations

It is assumed that firms have different technologies, and that an environment protection agency (EPA) knows which technologies exist but not which are used by which firms. Only firm outputs and total emissions, but not individual firm emissions are observable. Abatement technologies are known to the EPA, but it cannot observe individual abatement expenditures. It is analyzed under which conditions a regulatory mechanism based on joint punishment ensures a first best or only a second best allocation of resources.