Environmental Regulation as a Coordination Device for the Introduction of a Green Product: The Porter’s Hypothesis Revisited
According to Porter’s hypothesis, environmental regulation increases the regulated firms’ profits. However, if a “greener” strategy is more profitable why does it need regulatory intervention in order to be implemented? Let a greener product increase the adopter’s marginal cost while providing no additional benefits during the first period. In the second period, when the product's environmental attributes become known and appreciated by consumers, the adopter enjoys higher demand. By adopting the green product alone, a firm loses profits in the first period due to a) its increased costs, and b) its reduced market share; in the second period, it enjoys additional profits due to c) its increased quality, and d) its increased market share. If both firms adopt the green product market shares remain unaffected, therefore b) and d) disappear. While simultaneously adopting the green product can be profitable for both firms, for a single firm to pioneer adoption may not be so. Environmental regulation acts, therefore, as a co-ordination device reducing market inertia. By inducing both firms to act simultaneously it allows them to pass from one Nash equilibrium to another one with higher profits.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Olivier Bonroy & Christos Constantatos, 2008.
"On the use of labels in credence goods markets,"
Journal of Regulatory Economics,
Springer, vol. 33(3), pages 237-252, June.
- Bonroy, O. & Constantatos, C., 2007. "On the use of labels in credence goods markets," Working Papers 200709, Grenoble Applied Economics Laboratory (GAEL).
- Adam B. Jaffe et al., 1995. "Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 132-163, March.
- Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
- Adam B. Jaffe & Karen Palmer, 1997. "Environmental Regulation And Innovation: A Panel Data Study," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 610-619, November.
- Adam B. Jaffe & Karen Palmer, 1996. "Environmental Regulation and Innovation: A Panel Data Study," NBER Working Papers 5545, National Bureau of Economic Research, Inc.
- Simpson, R. David & Bradford, Robert III, 1996. "Taxing Variable Cost: Environmental Regulation as Industrial Policy," Journal of Environmental Economics and Management, Elsevier, vol. 30(3), pages 282-300, May.
- Ambec, Stefan & Barla, Philippe, 2002. "A theoretical foundation of the Porter hypothesis," Economics Letters, Elsevier, vol. 75(3), pages 355-360, May.
- Stefan Ambec & Philippe Barla, 2001. "A Theoretical Foundation of the Porter Hypothesis," CSEF Working Papers 54, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Karen Palmer & Wallace E. Oates & Paul R. Portney, 1995. "Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm?," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 119-132, Fall.
- Kennedy, Peter, 1994. "Innovation stochastique et coût de la réglementation environnementale," L'Actualité Economique, Société Canadienne de Science Economique, vol. 70(2), pages 199-209, juin.
- Barbera, Anthony J. & McConnell, Virginia D., 1990. "The impact of environmental regulations on industry productivity: Direct and indirect effects," Journal of Environmental Economics and Management, Elsevier, vol. 18(1), pages 50-65, January. Full references (including those not matched with items on IDEAS)