ARE SAFETY AND ENVIRONMENTAL PERFORMANCE STANDARDS OPTIMAL REGULATORYINSTRUMENTS

In safety and environmental regulation, economists have preached the v irtues of performance standards as opposed to equipment specification as the proper instruments of control. This prescription is made in the context of actual situations where the firm's product safety or envir onmental impact is regulated, but its product market is unregulated. W e show that when the firm's unregulated output market has some imperfe ction and when output marginal production costs are not independent of safety or abatement inputs, the use of performance standards is gener ally not optimal.