Standards and social welfare in Cournot oligopolies

This paper ranks two widely used command-and-control environmental instruments, in terms of relevant equilibrium variables such as output, profits, consumer surplus and social welfare. Specifically, we consider n symmetric and polluting firms that compete in quantity, have access to an exogenous cleaning technology (that cannot be modified by the firms) and are subject to environmental regulation by means of either emission or performance standards. We consider a one-stage game, where the instruments are exogenously fixed in such a way that pollution coincides for both regimes. In this game, the performance standard dominates in terms of output and consumer surplus, but the firms prefer the emission standard. In terms of social welfare, the performance standard may dominate the emission standard when the number of firms is limited, which contrasts with the case of perfect competition, where the emission standard is welfare-superior. These results on social welfare prevail when we introduce a previous stage where the environmental authority optimally chooses the instrument by maximizing social welfare, that is, when we endogenize the policies.