Technological incentives of firms under the environmental regulations

Recently, many theoretical and empirical studies have focused on the effectiveness of environmental regulations. For the regulation of industries, it has been recognized that effective regulation policies should be accompanied by incentives for individual firms to develop or introduce new technologies for the reduction of their waste production. This allows the critical environmental problems to be tackled from a much longer-term perspective. The effectiveness of environmental regulation is analyzed by focusing both on market incentives and regulation incentives of the regulated firms under the regulation. The study clarifies how the environmental regulations lead to technological incentives and/or disincentives for firms. More precisely, the whole regulatory situation among regulated firms and environmental agencies is modeled as a game. Firstly, the market competition (over the market share) among the firms in the same oligopoly market under the given environmental regulation by the environmental agency are modeled as a market game among the firms. The equilibria of the market game can be interpreted as 'market reactions' to the environmental regulation in force. Secondly, the environmental regulation is included in the study by constructing another game between the firms (or the market whose behavior is obtained as the 'market reaction' in the first game) and the environmental agency. The results of this research provide strong decision support for policy maker; to decide on introduction or enhancement of environmental regulation to a certain industry. It provides the theoretical relationships between the kinds of waste reduction technologies that the agency is targeting and the regulation to be used.