Why being green can make you happy and be good for the economy

The conventional neoclassical economic wisdom argues that the opportunity costs of environmental regulations are high, with negative implications for costs and profits and, by implication, for growth and per capita gross domestic product (GDP). The minority view that environmental controls induce cost offsets that minimize such opportunity costs is marginalized by the conventional wisdom, which assumes that economic agents are x-efficient in production. A behavioural model of the firm is presented in this chapter, whereby x-inefficiency in production prevails even in a world of perfect product market competition that is dominated by rational economic agents. In this model, environmental regulations affect both the level of x-efficiency and the extent of technological change and greener firms can be cost competitive and profitable. However, private economic agents cannot be expected to adopt ‘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.