Do Economic Incentives Guarantee Reductions in Industrial Waste Emissions?

Abstract

Traditionally, waste-reducing innovations have been widely believed to decrease the level of residues in our society and increase welfare. In the following article, however, we show that in an environment with underpriced pollution externalities, waste-reducing technologic progress guarantees neither a reduction in residues nor improvements in welfare. We show that technologic progress can actually result in a decrease in welfare in the presence of unenforceable fines. Finally, we argue that policy regimes based on joint agreements between regulatory agencies and firms are more likely to prevent the potentially negative impact of industrial innovations on the environment than regimes based on economic incentives.