Design standards and technology adoption: Welfare effects of increasing environmental fines when the number of firms is endogenous

Abstract

This paper examines the consequences of an increase in the expected fine for non-compliance with an environmental design standard for an industry with Cournot competition and free entry. Our analysis is quite timely, given recent policy proposals to raise environmental fines. We describe the range in which changes in the environmental fine have no consequences, and detail the various other effects that emerge. It is established that an increase in the expected fine for non-compliance may have adverse welfare consequences, while it always serves the purpose of inducing a greater share of firms to adopt the prescribed technology.