Presence of Green Consumers: Bat is Bad

Abstract

This paper examines the validity of the Porter hypothesis in the presence of environmentally conscious consumers and asymmetry of information between the regulator and the polluting agent. There are two implications of the Porter hypothesis. One, a policy based on "best available technology" hampers firms' incentives to invest in R&D effort for developing new and (environmentally) improved technology. Second, a stricter environmental regulation spurs innovation and thus improves welfare. We argue that the first implication is, indeed, true. As for the second, a stricter regulation is better, but the strictest possible regulation is not optimal.

Keywords: Environmentally conscious consumers, best available technology, environmental regulation, Porter's hypothesis, technological development, welfare, compliance

JEL Classification: L51, O38, Q28