Collective Voluntary Agreements and the Production of Less Polluting Products
Recently, some industries have collectively agreed not to produce models that do not meet an energy efficiency (and hence an environmental) standard. This paper presents a simple model that can be used to examine a voluntary collective agreement to limit or completely eliminate the low efficiency model of a given product (e.g., a low efficiency washing machine). We show that, when there is competition between firms, a collective agreement to limit or even eliminate production of the polluting model can actually increase profits for all firms in the industry. This suggests that a collective agreement of this type might actually be beneficial to firms, while at the same time improving environmental quality. However, the implicit enforcement that comes from the public nature of the commitment is necessary to ensure this outcome. This suggests that, by promoting such agreements, policymakers may be able to achieve substantial environmental gains with relatively little inducement. The impact on social welfare will then depend on whether these gains are sufficiently large to offset consumer losses from reductions in product variety and the associated price increases.
|Date of creation:||Jul 2006|
|Date of revision:||May 2007|
|Note:||We acknowledge the very useful comments of Madhu Khanna, Tom Lyons, seminar participants at Yale University, the University of Central Florida and the University of Rhode Island, and participants at the ASSA meetings in Philadelphia. Any remaining errors are our own.|
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