Environmental Policy and the Size Distribution of Firms
34 Pages Posted: 8 Mar 2015
Date Written: February 21, 2015
In this paper we analyze the effects of environmental policies on the size distribution of firms. We model a stationary industry where the observed size distribution is a solution to the profit maximization problem of heterogeneous firms that differ in terms of their energy efficiency. We compare the equilibrium size distribution under emission taxes, uniform emission standards, and performance standards. Our results indicate that, unlike emission taxes and performance standards, emission standards introduce regulatory asymmetries favoring small firms. These asymmetries have significant detrimental effects on total output and total welfare, yet lead to reduced emissions and help preserve small businesses.
Keywords: Environmental regulations, energy efficiency, size distribution, emission taxes, emission standards, performance standards.
JEL Classification: Q58, L25, Q55
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