Thomas P. Lyon, Erb Faculty Member was published in the Journal of Public Economics, 87: 1453-1486. Thomas P. Lyon and John W. Maxwell (2003)
An increasingly popular instrument for solving environmental problems is the ‘public voluntary agreement (VA),’ in which government offers technical assistance and positive publicity to firms that reach certain environmental goals. Prior papers treat such agreements as a superior, low-cost instrument that can be used to preempt a threat of traditional, inefficient, regulation. We present a more general model in which public VAs may instead be weak tools used when political opposition makes environmental taxes infeasible. We explore the conditions under which taxes, public VAs, and unilateral industry actions are to be expected, and the welfare implications of the various instruments. Notably, we also show that welfare may be reduced by the introduction of public VAs.