When green isn't mean: economic theory and the heuristics of the impact ofenvironmental regulations on competitiveness and opportunity cost

The conventional neoclassical economic wisdom argues that the opportunity c osts of environmental regulations are high, with negative implications for costs and profits and, by implication: for growth and per capita gross dome stic product (GDP). The minority view that environmental controls induce co st offsets that minimise such opportunity costs is marginalised by the conv entional wisdom, which assumes that economic agents are x-efficient in prod uction. A behavioural model of the firm is presented in this paper, whereby x-inefficiency in production prevails even in a world of perfect product m arket competition that is dominated by rational economic agents. In this mo del, environmental regulations affect both the level of x-efficiency and th e extent of technological change and greener firms can be cost competitive and profitable. However, private economic agents cannot be expected to adop t 'Green' economic policy independent of regulations since, in this model, there need not be any economic advantage accruing to the affected firms in becoming greener. (C) 2001 Elsevier Science B.V. All rights reserved.