Environmental Regulations and Managerial Myopia

It has recently been claimed that, contrary totraditional neoclassical theory, suitably chosenenvironmental regulation is often beneficial for theregulated firms because it induces cost-reducinginnovations. I analyze the extent to which thisposition is compatible with microeconomic analysis. Itturns out that even in a framework in whichorganizational inefficiencies might lead tounderinvestment, environmental policy can onlyincrease firm profits if several very specificconditions are met. These conditions concern the typeof policy, the extent of inefficiencies, the costs ofpotential innovation projects and their effect onproductivity and abatement costs.

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