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Environmental Regulations and Managerial Myopia

By Armin Schmutzler


It has recently been claimed that, contrary to popular perception, suitably chosen environmental regulation is often beneficial for the regulated firms because it induces cost-reducing innovations. I analyze to which extent this position is compatible with microeconomic analysis. It turns out that even in a framework in which organizational inefficiencies might lead to underinvestment, environmental policy can only increase firm profits if several very specific conditions are met. These conditions concern the type of policy, the extent of inefficiencies, the costs of potential innovation projects and their effect on productivity and abatement costs.environmental regulation, internal inefficiencies, innovation offsets, managerial myopia

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