Firm Preferences for Environmental Policy: Industry Uniform or Firm Specific?

This paper examines the effect of uniform and firm-specific environmental regulation on the production decisions, and profits, of polluting and green firms. While both types of regulation increase firms' costs and thus entail a negative effect on profits, firm-specific regulation can also yield a positive effect for relatively inefficient firms by alleviating their cost disadvantage. When such cost disadvantage is sufficiently large, we show that the positive effect of firm-specific regulation dominates its negative effect, leading inefficient (efficient) firms to support (oppose) socially optimal regulation. Furthermore, our findings indicate that such support for environmental policy can originate not only from the most common ally (the green firm) but also from polluting firms.