Scandinavian Working Papers in Economics

CERE Working Papers,
CERE - the Center for Environmental and Resource Economics

No 2012:17: Regulation and Unintended Consequences

Rolf Färe () and Shawna Grosskopf ()
Additional contact information
Rolf Färe: Dept. of Economics, Postal: Oregon State University, Corvallis, Oregon, USA
Shawna Grosskopf: CERE, Centre for Environmental and Resource Economics, Postal: Dept. of Economics, University of Umeå, S-901 87 Umeå, Sweden

Abstract: Production of desirable outputs such as Kwh of electricity are often accompanied by the production of undesirable or ‘bad’ outputs such as SO2. These undesirable outputs are frequently regulated in the sense that their production is not allowed to exceed certain amounts. In this paper we analyze what we call the unintended consequences of regulation of bads where that regulation limits the quantity of bads produced. We consider the simple case in which there is one good and one bad output. Under constant returns to scale we provide a theorem that characterizes the situation in which quantity regulation of the bad output restricts the production of the intended good output. Our theorem is in the spirit of Shephard’s proof of the Law of Diminishing Returns.

Keywords: Regulation; Unintended Consequences

JEL-codes: Q40

7 pages, November 20, 2012

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CERE_WP2012-17.pdf PDF-file

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