Does more stringent environmental policy harm or benefit polluting firms? A GOLE approach

We examine the effects of stricter environmental policy in a simple oligopolistic general equilibrium model with pollution emitted by oligopolists. We identify a positive general equilibrium effect of stricter environmental policy on firm profits by lowering the wage rate. In some industries, this positive effect exceeds the negative direct effect of the increase in the firms' costs caused by the stricter environmental policy. Thus, in those industries, more stringent environmental policies benefit firms. Despite this possibility of stricter environmental policy benefiting some industries, the total pollution in the economy unambiguously decreases.