The Effects of Emissions Standards on Industry

Industrialists often claim that, by rendering firms unprofitable and hence forcing them out of business, stricter emissions standards reduce the industry output and competition. This paper considers situations where firms' pollution reduction increases the industry demand, but, because of inability to coordinate their emissions reductions, and thus free riding problem, they are unable to act in their own collective interest. For such situations, the paper studies the effects of emissions standards on the equilibrium in an oligopoly market. It shows conditions under which a stricter standard leads to a larger number of firms in the industry, a greater industry output, and a lower total pollution in the long run.