ABSTRACT
This chapter focuses on 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. Environmental regulations affect both the level of x-efficiency and the extent of technological change. Greener firms can be more productive than polluting firms, and greener economies might generate higher levels of per capita output than polluting economies. The multipart Porter Hypothesis was first put forth in Michael Porter’s oft-cited Scientific American essay. The least emphasized component of the Porter Hypothesis is that environmental regulation will induce companies to produce new, environmentally friendly products that prove internationally competitive, adding to an economy’s overall competitiveness. The Porter Hypothesis can be investigated in light of a behavioral model of the firm where x-inefficiency in production is a possibility.
