Welfare enhancing regulation exemptions

Sanctions for regulation violations are used to deter conduct which could potentially result in great social harms. This practice over-deters low-risk entities and under-deters high-risk entities, which leads to social losses. This paper analyzes whether and how such social losses can be mitigated. I show that this can be achieved by allowing regulatees to purchase passes exempting them from regulations at appropriate prices, although they remain liable for any harm they cause.