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The impact of environmental policies on productivity and market competition

Published online by Cambridge University Press:  17 February 2014

Javad Sadeghzadeh
Javad Sadeghzadeh*
Affiliation:
Department of Economics, York University, Room 1144, Vari Hall, 4700 Keele Street, Toronto, M3J 1P3, Ontario, Canada. Tel: (416) 736 2100. E-mail: jay373@econ.yorku.ca
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Abstract

While a large body of the literature on environmental policies has focused on the productivity impacts of regulations, less attention has been given to the link between environmental policies and market competition. In this paper, I develop a tractable model that incorporates variable mark-ups to study how a competitive environment is affected by environmental policies in a market with firm heterogeneity and endogenous abatement technology choice. The findings of this study are consistent with the Porter Hypothesis in the sense that environmental regulations motivate abatement technology adoption and enhance productivity and environmental quality. However, the productivity gain is mainly driven by reallocation of resources across firms rather than the induced abatement technological change. Tougher regulations harm the competitive environment by increasing average prices and market concentration. Social welfare also drops because in the absence of strong competition fewer variates are produced in equilibrium.

Type
Research Article
Information
Environment and Development Economics , Volume 19 , Issue 5 , October 2014 , pp. 548 - 565
Copyright
Copyright © Cambridge University Press 2014 

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