Reducing the use of polluting products: An evaluation of alternative policy approaches

Date of Completion

January 2008


Economics, General|Environmental Sciences




The thesis investigates different approaches to reducing environmental damages from the use of final products. I consider oligopoly markets with multiproduct firms where competition between models, as well as between firms, exists. Each firm produces a vertically differentiated product with a brown and a green version to target different market segments. The approaches considered range from the purely voluntary industry initiatives to regulation of product markets. Motivated by the European appliances agreements, the first chapter attempts to examine product related voluntary agreements (VAs) where firms collectively agreed not to produce models of a product that do not meet an environmental standard. I show that a collective VA to limit production of the brown model can increase industry profit even when no firm would benefit from producing less of the brown model unilaterally. However, if a sufficiently large number of firms cheat or not commit, the agreement becomes unprofitable, which highlights the importance of enforcement. Chapter two investigates alternative policies to regulate emissions considering the case of automobiles. The two policies considered are: a quota on luxury cars and a more flexible average efficiency standard (AES) that requires a minimum energy efficiency across models, similar to the US Corporate Average Fuel Economy (CAFE) standards. While a quota can raise profit over a certain range, the AES always reduces firm profit relative to the pre-regulation and may result in an increased level of emissions from new cars. When unit damages are sufficiently high, the quota is more efficient than the AES. Thus, instead of tightening CAFE, policy makers can shift to a quota policy which is both welfare enhancing and more profitable. Chapter three identifies two factors that affect the success of VAs, namely, the nature of the product and the nature of the VA (quota based or AES based VA). Regarding the nature of the product, I distinguish between products for which there is a tradeoff between environmental performance and overall product quality and products for which there is no tradeoff. The AES VA always results in a lower industry profit than a quota based VA as it creates more competition between firms. Under the tradeoff market only the quota based VA can raise industry profit. ^