ABSTRACT
This chapter develops a behavioral model of the firm where pollution is a joint output of production where both “goods” and “bads” are produced. In this model, x-inefficiency prevails even in a world of perfect product market competition dominated by rational, utility-maximizing economic agents. In this scenario, environmental regulations affect both the level of x-efficiency and the extent of technological change. Contrary to what is argued by the conventional wisdom, economic theory per se does not preclude environmental regulations or environmentally friendly firm owners motivating increases in firm productivity as cost offsets to the development of environmental friendliness. In the behavioral model of the firm, it is quite possible for firms to systematically avoid developing and implementing environmentally friendly production processes even if these are not expected to generate higher unit production costs or lower rates of profit.
