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Tailored Regulation: Will Voluntary Site‐Specific Environmental Performance Standards Improve Welfare?
Author(s) -
Blackman Allen,
Boyd James
Publication year - 2002
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2002.tb00494.x
Subject(s) - agency (philosophy) , incentive , business , welfare , regulatory agency , environmental regulation , industrial organization , oligopoly , public economics , economics , microeconomics , market economy , philosophy , welfare economics , epistemology
Increasingly popular tailored regulation (TR) initiatives like the Environmental Protection Agency's Project XL allow industrial facilities to voluntarily substitute site‐specific environmental performance standards for inefficient command‐and‐control regulations. TR can significantly reduce participants' costs of complying with environmental regulations, but in doing so it can also give these participants a competitive advantage. Here we develop an analytical model to show that TR can have adverse welfare effects when if enables relatively inefficient firms in oligopolistic markets to “steal” market share from more efficient firms, and we characterize the regulatory policies that give rise to such outcomes. We also show that regulators' efforts to diffuse the benefits of site‐specific agreements among nonparticipating firms dampen incentives to participate in TR.