| Many production processes feature joint production of a desirable output with an undesirable byproduct. Producers and consumers of the desirable output mutually benefit at the expense of non-consumers, who bear external damage costs imposed by production of the undesirable byproduct. A standard approach to regulating such production activities is through the combination of a limit on allowable production effort in conjunction with a cap on the level of the undesirable output. The situation is greatly complicated when the production externality is a random function which depends on the level of production effort. In this case, capping undesirable output induces a random limit on the level of the production effort, assuming further production is... |
