RELATIVE STANDARDS - A POSITIVE AND NORMATIVE ANALYSIS

The paper considers relative standards which Limit the level of emissi ons per unit of output. The representative firm is characterized by a cost function describing the actual production process, a separate aba tement technology, and the fact that (gross) emissions are proportiona l to output. At first, the implications of a relative standard and of its marginal change for a single firm are examined. It is shown that t he standard cannot be replaced by a corresponding tax. Afterwards a po sitive analysis is performed for an industry consisting of identical f irms under perfect competition. Comparative statics are used to analyz e the impacts of changes in the relative standard in a short-run and l ong-run equilibrium. It turns out that the standard always possesses a price effect. Moreover the relevant factors which govern price, quant ity, and profit changes are revealed. Then the paper characterizes the optimal standard for the same framework. A main result is that the fi rst-best allocation can never be obtained by means of a relative stand ard, even if firms are identical. The influence of the demand and supp ly side on an optimal standard can be demonstrated since the underlyin g model is simple and transparent. The resulting market price is compa red to social marginal costs. Finally the investigation is extended to monopoly and symmetric oligopoly.