Voluntary pollution abatement and regulation in the presence of a green market
We present a model in which firms voluntarily abate emissions in a market that values environmental quality such that firms can charge a premium for goods that are environmentally friendly. Our results establish conditions under which mandatory abatement crowds out voluntary abatement, or, alternatively, provides an incentive for firms to increase their level of voluntary abatement in order to maintain product differentiation. In addition, we identify cases under which firms that do not abate voluntarily would support mandatory abatement if they are able to collectively pass off (at least part of) the costs of abatement to consumers. Our model predicts that regulatory policies that ignore voluntary abatement are likely to over-regulate non-abating firms compared to the level of regulation that accounts for voluntary abatement if consumer income levels in the green market are relatively high. If consumer income levels in the green market are relatively low, regulation may be ineffective in improving overall environmental quality.
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