Commitment in Environmental Policy as an Entry-Deterrence Tool

Abstract

This paper investigates under which conditions governments strategically commit to stringent environmental policies in order to protect domestic markets from entry. We compare social welfare under two policy regimes: a ?exible and in?exible environmental policy. We show that commitment becomes socially optimal when its associated welfare loss, due to a stringent fee across time, is smaller than its welfare gain, which arises from an improved environmental quality. Otherwise, the regulator optimally chooses a ?exible environmental policy which cannot credibly deter entry. In addition, we demonstrate that the incentives of the social planner and the incumbent fi?rm are not necessarily aligned regarding entry deterrence. In particular, under certain conditions the regulator ?nds socially optimal to practice entry deterrence whereas the incumbent would actually prefer entry.Entry deterrence, Emission fees, Perfect commitment