Epsilon Archive for Student Projects

Abstract

There is a possibility to mitigate the externalities from production by expenditures on abatement. However, it is believed that these costs have a negative influence over the firm's competitiveness. Despite the fact that a tradeoff between social benefits (increase of welfare by reduction of environmental problems) and private costs (of the firm) is observed, there is an increasing number of firms that reduce their environmental impact even more than is required (so-called 'over-compliance'). Therefore, the aim of this paper is to find how the firm's competitiveness is influenced under the mandatory environmental regulation by government and under a voluntary initiative of abatement by the firm.

From the literature review it was found that there are three different approaches towards this 'relationship': inevitable loss in competitiveness; no loss or even gain in competitiveness; and finally gain in competitiveness by imposing environmental standards voluntary by the firm itself. Thus two models provided by Palmer et al. (1995) and Porter & Linde (1995), and the concept of Corporate Social Responsibility are discussed.

Compliance costs, productivity measures and changes in trade patterns were used as indicators of the relationship between environmental regulation and firm's competitiveness in empirical studies. It was concluded that no loss or little loss was identified from compliance with environmental regulation for the environmental sensitive industries. On the other hand, gain in firm's competitiveness was observed, when additional environmental standards were set within the firm, under the voluntary approach.