Environmental Subsidy and Audit under Budget Constraint

While the investment in environmental protection, such as equipment of pollution abatement, can reduce the level of environmental damage, it increases the firm's cost burden. Subsidy on investment in environmental protection and audit on pollutant emission are often used to alleviate costly externalities generated by optimizing economic firms. Nevertheless, budget constraint can bring about a significant impact on the determination and effectiveness of those policies; e.g., the insufficiency of budget will result in idleness of de-pollution equipment. In this paper, we intend to examine the interaction between two policy measures, specifically under budget constraint, in order to enlighten some policy implications.