ARE SAFETY AND ENVIRONMENTAL PERFORMANCE STANDARDS OPTIMAL REGULATORY INSTRUMENTS

In safety and environmental regulation, economists have preached the virtues of performance standards as opposed to equipment specification as the proper instruments of control. This prescription is made in the context of actual situations where the firm's product safety or environmental impact is regulated, but its product market is unregulated. We show that when the firm's unregulated output market has some imperfection and when output marginal production costs are not independent of safety or abatement inputs, the use of performance standards is generally not optimal.