Erratum: Standards versus Standards: The Effects of Different Pollution Restrictions

Abstract

When economists refer to pollution standards, they almost universally mean uniform restrictions on pollution emissions (e.g., William J. Baumol and Wallace E. Oates, 1975 Ch. 13; Susan Rose-Ackerman, 1973; David Besanko, 1978). However, in practice, standards take many forms: not only emissions restrictions, but restrictions on pollution per unit of output or per unit of an input, restrictions on the use of a polluting input, or mandated use of a particular pollution-control technology. These specifications of regulations will have a variety of effects on a firm's resource-allocation decisions. For instance, allowing pollution per unit of output as the standard instead of directly restricting the level of pollution gives the firm some choice: in addition to reducing pollution, it can increase its output to dilute the pollution. This paper examines the effects of five different forms of pollution standards on input decisions, the level of production, and firm profits. The results show that the different standards, by providing firms with different incentives, change the firm's allocation decisions and affect the relative profitability of the standards. Section I reviews the existing literature on the incentives of different instruments. The following section describes the model to be used. Five different forms of pollution constraints are individually examined in Section III using a graphical approach. Their relative effects, as well as some special cases, are assessed in Section IV. Finally, Section V raises the case of different standards when firms are not identical.

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