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When does environmental regulation facilitate entry-deterring practices

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  • Espínola-Arredondo, Ana
  • Muñoz-García, Félix

Abstract

This paper evaluates the welfare benefits of introducing environmental regulation in a market that is subject to the threat of entry. We consider complete and incomplete information settings, where potential entrants use the regulator's tax policy and the incumbent's output decisions in order to infer the incumbent's cost structure. When the regulator is absent, we show that firms' entry-deterring practices increase pollution relative to complete information. Hence, under certain conditions, environmental regulation becomes more beneficial in incomplete than in complete information contexts. Our results, therefore, identify under which cases an under- or over-estimation of the welfare benefits of environmental regulation arises from ignoring the information setting in which firms interact. We also examine how this estimation error increases as firms become more symmetric in their production costs.

Suggested Citation

  • Espínola-Arredondo, Ana & Muñoz-García, Félix, 2013. "When does environmental regulation facilitate entry-deterring practices," Journal of Environmental Economics and Management, Elsevier, vol. 65(1), pages 133-152.
  • Handle: RePEc:eee:jeeman:v:65:y:2013:i:1:p:133-152 DOI: 10.1016/j.jeem.2012.06.001
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ana Espínola-Arredondo & Félix Muñoz-García, 2016. "Profit-enhancing environmental policy: uninformed regulation in an entry-deterrence model," Journal of Regulatory Economics, Springer, vol. 50(2), pages 146-163, October.
    2. Boying Liu & Ana Espinola-Arredondo, 2013. "The Impact of Environmental Taxes on Firms' Technology and Entry Decisions," Working Papers 2013-2, School of Economic Sciences, Washington State University.
    3. Ana Espinola-Arredondo & Boying Liu, 2014. "The Impact of Environmental Taxes on Firm’s Technology and Entry Decisions," Working Papers 2014-4, School of Economic Sciences, Washington State University.
    4. Muñoz-Garcia Félix & Espinola-Arredondo Ana, 2015. "The Signaling Role of Subsidies," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(1), pages 1-22, January.
    5. Jihad C. Elnaboulsi, 2015. "Environmental Regulation and Policy Design: The Impact of the Regulator?s Ecological Conscience on the Tax Setting Process," Working Papers 2015-11, CRESE.
    6. Ana Espínola-Arredondo & Félix Muñoz-García, 2015. "Can Poorly Informed Regulators Hinder Competition?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 433-461.

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