Traditional and Emergent Environmental Regulations and the Policies of the Firm


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We study in this paper the impact of a Public Disclosure Program(PDP) as well as traditional environmental regulation (tax/subsidy) on optimal policies of the firm. A PDP aims at forcing the firm to report its emissions. This information affects its image (goodwill), and ultimately its profit. In our model, this impact is endogenous, i.e., a firm polluting less than its prescribed target would win consumer’s sympathy and raises its goodwill, whereas it is the other way around when the firm exceeds its emissions quota. The concept of goodwill (or brand equity) is inherently dynamic and so is our model. The evolution of this goodwill is assumed to depend also on advertising expenditures. We address the following research questions: (1) What are the optimal emissions, pricing and advertising policies of the firm under the different regulatory regimes? (2) How the different regulatory scenarios, i.e., PDP, tax/subsidy, both regulations, and no regulation (laisser-faire policy), compare in terms of the above policies? (3) Under which conditions, if any, a PDP can be profit improving?

, 26 pages

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G-2007-16.pdf (200 KB)