Economics of Downward Revision of Environmental Standards and Actions

Donald E. Agthe

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DOI: 10.2190/69NT-3WMR-MPBX-XPN9

Abstract

This article examines the theoretical ramifications of a downward revision of environmental standards or actions. It points out that firms complying with earlier standards make capital commitments based on the higher standard. Since the earlier standard is the only signal the firm has in its planning process, the issue is raised, but not resolved, of whether the earlier standard represents an implicit contract between society and the firm. If so, this might imply compensation is needed for the firms unrecoverable capital expenditures. It is also pointed out that society may also bear some of the lost capital cost. Lastly, the article considers the advantage gained by firms that did comply with the earlier regulation.

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