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Environment, irreversibility and optimal effluent standards

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  • Jou, Jyh-Bang
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    Abstract

    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 emission‐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.

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    File URL: http://purl.umn.edu/117864
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    Bibliographic Info

    Article provided by Australian Agricultural and Resource Economics Society in its journal Australian Journal of Agricultural and Resource Economics.

    Volume (Year): 48 (2004)
    Issue (Month): 1 (March)
    Pages:

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    Handle: RePEc:ags:aareaj:117864

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    Keywords: Environmental Economics and Policy;

    References

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    1. Gaudet, Gerard & Lasserre, Pierre & Van Long, Ngo, 1998. "Real investment decisions under adjustment costs and asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 71-95, September.
    2. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, vol. 22(3), pages 233-259, July.
    3. Jung, Chulho & Krutilla, Kerry & Boyd, Roy, 1996. "Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 95-111, January.
    4. Mohtadi, Hamid, 1996. "Environment, growth, and optimal policy design," Journal of Public Economics, Elsevier, vol. 63(1), pages 119-140, December.
    5. Barbera, Anthony J & McConnell, Virginia D, 1986. "Effects of Pollution Control on Industry Productivity: A Factor Demand Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 35(2), pages 161-72, December.
    6. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
    7. Montero, Juan-Pablo, 2002. "Permits, Standards, and Technology Innovation," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 23-44, July.
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    Cited by:
    1. Lee, Tan & Jou, Jyh-Bang, 2007. "The regulation of optimal development density," Journal of Housing Economics, Elsevier, vol. 16(1), pages 21-36, March.

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