State Environmental Standard-Setting: Is There a "Race" and is it "to the Bottom"?

Abstract

Of the numerous theoretical rationales used to justify federal environmental regulation, perhaps the most broadly compelling is the argument that without such regulation, states would engage in a welfare-reducing "race-to-the-bottom" in environmental standard-setting. Recently, in the wake of a widely cited article by Professor Richard Revesz, scholars are questioning the very existence of a race-to-the-bottom in environmental standard-setting. Swimming against the tide of prior scholarship, these revisionist critics contend that the effects of state competition upon state environmental standard-setting are welfare-enhancing, rather than welfare-reducing. The theoretical basis for their arguments is neoclassical economics, according to which each state's individual rational pursuit of its own best interest, when set in the context of an ideally competitive playing field, leads to socially optimal allocations between environmental amenities and material goods. In contrast, under the game theoretic approach underlying the Prisoner's Dilemma, which has traditionally served as the theoretical basis for the race-to-the-bottom rationale, the very same behavior assumed in the revisionist' neoclassical model - rational pursuit by individual states of their own best interest - leads to the opposite result: inefficient allocations, suboptimal environmental standards, and reduced overall welfare. This article argues that (1) the preponderance of the evidence available at this time supports game theoretic approaches for understanding interstate conflicts over simple neoclassical frameworks; and (2) even if a neoclassical framework is used, evidence suggests that the interstate market for industrial development and environmental benefits is substantially distorted. Indeed, this article argues that the neoclassical model, when combined with empirical realities, tends to undermine the claim that interstate competition leads to efficiency, indicating instead that such competition in the real world is presumptively detrimental to social welfare. Thus, there is little reason to believe that state environmental standards established in the absence of a federal framework will be optimal.

Keywords: State, environmental, standards, federal, interstate competition, mobile industry, race-to-the-bottom, efficiency, optimal, prisoner's dilemma, neoclassical economics, Revesz, Oates, location standards, empirical evidence, social welfare