Design standards and technology adoption: welfare effects of increasing environmental fines when the number of firms is endogenous

This paper examines the consequences of an increase in the expected fine for non-compliance with an environmental design standard for an industry with Cournot competition and free entry. Our research question is timely and relevant, given recent policy proposals to raise environmental fines. We describe the range, in which changes in the environmental fine have no consequences, and detail the various effects that emerge otherwise. It is established that an increase in the expected fine for non-compliance may have adverse welfare consequences, while it always serves the purpose of inducing a greater share of firms to adopt the prescribed technology. However, when there are limits with respect to the sanctions, it may be welfare-maximizing to have no deterrence at all. © 2016, Society for Environmental Economics and Policy Studies and Springer Japan.