This chapter, which is the first of four chapters dealing with the effects of environmental regulation, is about the microeconomic effects at the firm and industry level. Specifically, this chapter deals with the effects of environmental regulation on the costs of production, plant location and productivity. For its opponents, environmental regulation raises the costs of production, affects plant location (in such a way as to make firms inclined to choose locations with low environmental standards) and has an adverse effect on productivity. For the proponents of environmental regulation, these effects are neutral or perhaps positive in the sense that environmental regulation is not relevant to the choice of plant location, it may have a positive effect on productivity, and it produces benefits that make the net cost of compliance lower than the observed gross cost. While these arguments pertain primarily to the expenditure required to be compliant with the provisions of environmental regulation, they are equally valid for any spending related to the firm’s environmental performance. For example, even without explicit environmental regulation the costs of production rise if a firm decides on its own, without pressure from the regulators, to go green. We will come back several times to the issue of why firms may want to go green without regulation or spend more on environmental management than is required by regulation; then we deal with it explicitly in Chapter 8.
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