University of Winnipeg
We analyze the efficacy of environmental regulation in the presence of
an endogenous informal sector. Firms in an imperfectly competitive
formal sector produce a final good using a polluting intermediate
good. The firms can either produce the intermediate good or purchase
it from a price-taking informal sector. An environmental regulator
sets the emission intensity of the intermediate good that all formal
sector firms implement honestly but informal sector firms seek, and
are sometimes able, to evade.
We show that, depending on the stringency of the regulation and its
enforcement, the informal sector can act as a source of pollution
leakage. Stricter regulation can increase or decrease total pollution,
and may even have a non-monotonic impact. Further, price
discrimination by the formal sector, when it purchases the
intermediate good from the informal sector, can worsen regulatory
compliance by the informal sector and lead to lower welfare.
Date: November 25, 2011
Time: 02:30 P.M.
Seminar Room 2
Indian Statistical Institute Delhi Centre,
7, S. J. S. Sansanwal Marg,
New Delhi-110016 (INDIA)
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