Environment, irreversibility and optimal effluent standards

The present article investigates the use of performance standards to correct environmental externalities. Each firm in an industry emits waste in the production process, and, in turn, the average waste emissions of the industry adversely affect the firm's productivity. The firm, which incurs sunk costs when employing capital to abate waste emissions, is uncertain about the efficiency of capital. The firm will underestimate environmental externalities and will therefore pollute more than is socially efficient. To correct this tendency, the regulator can set a limit on either emissions or the emissionā€output ratio at the socially efficient level. The firm will invest more, produce more, and pollute less when the regulator implements the former than when the regulator implements the latter.


Issue Date:
2004
Publication Type:
Journal Article
PURL Identifier:
http://purl.umn.edu/117864
Published in:
Australian Journal of Agricultural and Resource Economics, Volume 48, Issue 1
Page range:
127-158
Total Pages:
32




 Record created 2017-04-01, last modified 2017-04-04

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