Frontiers of Environmental Economics
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Frontiers of Environmental Economics

Edited by Henk Folmer, H. Landis Gabel, Shelby Gerking and Adam Rose

Top European and American scholars contribute to this cutting-edge volume on little-researched areas of environmental and resource economics. Topics include spatial economics, poverty and development, experimental economics, large-scale risk and its management, organizational economics, technological innovation and diffusion and many more.
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Chapter 6: The firm, its procedures and win-win environmental regulations

H. Landis Gabel and Bernard Sinclair-Desgagné

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6. The firm, its procedures and win–win environmental regulations H. Landis Gabel and Bernard Sinclair-Desgagné The firm in mainstream economic theory has often been described as a ‘black box.’ And so it is. This is very extraordinary given that most resources in a modern economic system are employed within firms, with how these resources are used dependent on administrative decisions and not directly on the operation of a market. (Coase, 1992, p. 714) Most production in modern economies occurs within organisations, and this production is regulated only to a limited extent by prices. … These observations make it clear that if economists wish to understand how resources in modern economies are allocated, we must understand what goes on inside organisations. (Stiglitz, 1991, p. 15) It has been customary among environmental economists schooled in the neoclassical tradition to assume that the link between environmental regulatory policy and the allocation of environmental resources is very simple. It is a perfectly rational and efficient black box firm, which maximizes profits given whatever technological, market and regulatory policy constraints are imposed on it. Because economists have long assumed that the firm behaves in this way, and have been content to model its behaviour as such, they saw no reason to pierce the corporate veil to understand in microanalytic detail the management processes taking place within the firm. This tradition has had several predictable results. One was that economists concerned with environmental problems focused their attention almost exclusively on public policy instruments applicable...

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