Overcompliance with endogenous environmental standards and quantity competition

Abstract

We propose a model of environmental overcompliance where firms set the environmental quality of their products and compete in quantities, while the government imposes an environmental standard with the aim to maximise welfare. We show that all firms overcomply if the environmental impact of production is sufficiently low, otherwise unilateral overcompliance emerges by the firm with higher environmental quality. With price competition, the introduction of an environmental standard quality always brings about unilateral overcompliance.

JEL codes:

• L13
• L51
• Q50

Keywords:

• environmental standard
• overcompliance

Acknowledgements

We are grateful to Pierre Picard, Joanna Poyago-Theotoky, the editor Ken Willis and two anonymous referees for comments that lead to a substantial improvement of the paper. An earlier version has been presented at the University of Luxembourg, 2013. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. This modelisation of the environmental damage has been borrowed from Lutz, Lyon, and Maxwell (2000).