ABSTRACT
This paper presents a model of pollution regulation in an oligopolistic market. Two forms of regulation are considered: performance standards which regulate pollution directly by an upper limit on emissions, and design standards which regulate pollution indirectly by a minimum usage requirement of an emissions control input. Equilibria under each regulatory regime are characterized. A welfare analysis reveals that performance standards are preferred to design standards if the objective is minimization of emissions plus pollution damage costs. However, the comparison is indeterminate if the regulator’s objective is total surplus less pollution damage. An equivalence between emissions taxes and performance standards is established, so the above welfare comparisons also apply to emissions taxes versus design standards.
