Optimal Regulatory Instruments for a self polluting firm in the presence of water pollution

Transcription

1 Optial Regulatory Instruents for a self polluting fir in the presence of water pollution Anandajit Goswai 1 Souvik Bhattacharjya 2 Nilanjan Ghosh 3 Keywords: Myopic, Visionary, Econoic Instruents, Inforation, Non- Mandatory Approaches JEL Classification: Q25, Q32, Q56,Q 57 Abstract The paper ephasizes of profit axiizing firs that produce output (with water being an iportant input in the production process), and generates a negative externality like pollution in water resources. Such quality degradation in the water input affects, inevitably, the production of fir in the forthcoing period. In order to capture this, the paper envisages the existence of two types of firs, naely, yopic and visionary. The yopic fir is one that axiises its profit function without considering the ipacts for the future period. One the other hand, the visionary fir axiises its profits by considering the entire planning horizon of its existence. The paper argues that better decision in ters of resource use and profit is taken by the visionary fir, as copared to the yopic fir. The paper has been attepted in the context of industries like textile, paper and pulp, which creates an adequate aount of water pollution using water as an essential input in the production process. Thus, the paper presents a theoretical fraework for regulating the polluting behaviour of the firs in water polluting industries. 1 Regulatory Policy Area, Regulatory Studies and Governance Division, The Energy and Resources Institute (TERI). Eail anandjit@teri.res.in 2 Resource and Developent Econoics, Policy Analysis Division, The Energy and Resources Institute (TERI). Eail souvikb@teri.res.in 3 Departent of Policy Studies, TERI School of Advanced Studies. Eail nghosh@teri.res.in 1

2 1. Introduction Water pollution through eissions by firs is a atter of prie concern in today s world. The increasing awareness and concerns over water pollution have led to the developent of new approaches towards achieving better anageent of water pollution, water quantity globally. However, econoic instruents, as odes of regulation, have rarely been put forward in developing countries, and if at all ipleented, they have been applied priarily on an ad-hoc basis, without proper econoic rationale. Coand and control easures still reain the basis of pollution control in developing countries {Ghosh. N Forthcoing (in press)}. This paper relates to a fraework, which shows how a representative fir, being visionary, can actually take a better decision on water use, as copared to the condition of being yopic. In this structure of environental regulation, a fir faces a supply constraint on environental services in the for of prescribed standards for the effluent quality. The effluent standards are norally fixed such that the deand for the services of environental resources like water does not exceed the natural sustainable level of supply. The fir has to spend soe of its resources to reduce the pollution loads to eet the effluent quality standards. The fir with a resource constraint will have lesser resources left for the production of its ain product after eeting the standards. Therefore, the opportunity cost of eeting these effluent quality standards is in the for of a reduced output of the fir. If all the firs in the industry eet the standards, the value of the reduced output of firs is the cost of sustainable industrial developent. The entry point of research is fro the point that in a given situation a fir using water as an input in its production process (with the objective of profit axiization process) faces a situation where the deand for the services of environental resources like water does not exceed the natural sustainable level of supply which is available to the fir at each point of tie. The first section of the paper highlights about the literature review which has been done for deriving the odeling approach. The second section of the paper deals with the entry point of the research, selection of the variables for the odel, definition of 2

3 the yopic, visionary firs, theoretical odel followed by the final section of the paper which illustrates soe of the interesting corollary of non andatory approaches to regulation which could be linked to the theoretical odeling. 2. Literature Survey Literature, however, has been replete of fraeworks dealing with econoic instruents, like valuation of water pollution. While initial attepts date way back in the 60s, it was in the early eighties that the ipact of environental regulation on the econoic perforance of firs started being conducted. The ultiate ai of these studies has been to easure the effect of pollution regulation on total factor productivity growth (TFP). The absolute shadow prices of the undesirable outputs reflect the opportunity cost, in ters of foregone revenue, for an increental increase in the use of water and water pollution. The United Nations Manual (2003) of Syste of Environental and Econoic Accounting (SEEA) provides descriptions of aintenance cost or cost of sustainable use of environental resources. According to SEEA, there are two ajor valuation techniques naely cost based valuation ethod and daage based valuation ethod. Costs based valuation techniques are based on the costs of itigating and abating environental daages fro production processes. According to SEEA there are three ways in which eissions polluting water by water- using firs can be controlled. Steps can be taken to avoid the eissions in the first place, either by abstaining fro the activity or by substituting less daaging inputs. The second solution is to procure, treat the eissions and to ake the less harful. The third option is to restore the environent by eans of clean-up activities. A nuber of recent studies have tried to value environental daage especially based on pollution fro firs. Fare et al. (1993) have used output distance function approach to derive shadow prices for air pollutants for USA. They showed how to adjust efficiency easures in the presence of undesirable outputs and also how to estiate output distance functions as frontiers in order to generate shadow values of the undesirable outputs that are required to ake both types of adjustent. Coggins & Swinton (1996) estiate the shadow price of SO 2 abateent for Wisconsin coal burning 3

4 utility plants, USA. There has been attept to estiate the costs of abating nitrogen pollutants by linking costs for construction of wetlands to the de-nitrification capacity of wetlands for Sweden. Results deonstrate that the wetlands have the capacity to provide low cost abateent of nitrogen copounds in runoff. Epirically testing of pollution abateent efforts of Chinese industries in response to pollution regulations, especially the pollution charge instruent practiced in China for about 20 years. The results show that the plant-level expenditure on end-of-pipe wastewater treatent is strongly responsive to the pollution charges. The estiated elasticities of operation cost and new investent with respect to the pollution price are 65 and 27% respectively. In India Murty & Kuar (2002) have estiated the cost of water pollution abateent of the Indian water polluting industries. A nuber of recent studies have also explored the relationship between econoic developent and environental quality. Transition paths for pollution, abateent effort and developent under alternative assuptions about social welfare functions, pollution daage, the cost of abateent, and the productivity of capital have been developed in the recent years. Epirical studies have searched for systeatic relationships by regressing cross-country easures of abient air and water quality on various polynoial specifications of incoe per capita. Overlapping generations econoy has been used in water pollution studies in which young individuals choose between investing in physical capital or in environental aintenance. Each period, firs buy non-tradable perits of eissions fro the governent. The proceeds are redistributed to young households. The study shows that environental aintenance ay be positive or zero at equilibriu. In the business-as-usual econoy, the higher capital accuulation, the lower environental quality. In equilibria with perits sales and no aintenance, the dynaics of capital and those of environent is independent. If aintenance is also operative, capital and environental quality ove together, i.e. the econoy ay becoe wealthier and cleaner. The analysis has been carried out with both instruents perits and aintenance when the econoy lies initially at business-as-usual steady state. It has been seen in this case that there always appears an iediate gain in environental quality. However the agnitude of this gain is not always aintained in the long run. 4

5 3. Entry Point of this Research The basic preise with which this odeling analysis begins is that the endowent of water is available and given at any point of tie. The odeling akes a siplistic assuption that with an acute water scarcity the water availability is always given for the firs which are using water as their input and the water deand by the firs never exceeds the water availability. The water availability is thus not dependent on tie in our odeling fraework. The condition is just like as if the firs are being iposed and forced into a situation where water is being given to the and they have to utilize the given aount of water, which is available to the. 3.1 The Model Selection of the variables: The independent variable used in the odel as an input is the water quantity used in the production process. The only variable which is an independent variable in the odeling functional fraework is the water used in the production process. Although the odel deals with water polluting and water using firs, no variable capturing water quality has been incorporated into the odel. The reason behind it is the fact that the odel works on the preise of the assuption that larger the firs are ore is the water used for generating outputs which eans greater ipact on the water quality by these water using firs. There is hence a correlation between the water quantity used and the ipact on the water quality by the water polluting firs as they produce the outputs which generate the revenue for the. In order to avoid any ulticollinearity proble between the input variables in the odel only one variable which is water quantity has been taken into the odel. Water quality has been not taken in the odel as it is iplicit in the assuptions of the odel that larger the water used by a fir for generating its output greater is its polluting ipact on the quality of the water which the literature entioned above on water polluting behavior of firs using water also justifies. 5

6 3.2 Definition of yopic and visionary fir Given this set up of the odel the next task is to define what is a yopic and a visionary fir in the context of the odel. A yopic fir is a fir which axiizes its profit by producing the output using water with the given endowent of water but fails to discount the ipact of its input usage on the water degradation and hence on water quality which thereby ipacts its productivity and hence its profits too in the long run. In this odel there are only two periods for siplicity. So a yopic fir doesn t discount the pollution and the negative ipact on water degradation, quality (through water pollution) created by the fir in the first period which affects its output, productivity, profit in the second period. But the visionary fir could visualize this possible ipact of water degradation and on water quality (through pollution) in the first period and hence discounts the second period profits while taking its profit axiization decision in first period. So a visionary fir anages its inputs ore efficiently although both the yopic and visionary fir produces with the objective of profit axiization. Thus the visionary fir anages the inputs ore efficiently and realizes ore profits in two periods by producing in an environentally sustainable way (i.e. creating less ipact of water degradation and water pollution). 4. The Theoretical Fraework 4.1 There are two firs in the odel viz. yopic and visionary. The assuptions for the odels are as follows: 1. The firs specialize on a single product. 2. The firs use labour (L), capital (K) and water (W) as inputs for production. 3. Production is carried out in two distinct tie periods viz. period1 and period2. 4. The objective of the fir is to axiize profits in both the periods. The output of the firs is denoted by Y. As the production takes place water is used in the process which results in degradation of water quality. Given initial water 6

7 endowent, in the absence of the pollution treatent plant, less usable water will be available in later stages of production. The degradation of water is assued to be a function of output which is defined as φ (Y), such that,φ (Y) > 0, φ (Y) > 0. This eans that with increase in production there will be degradation of water and the rate of degradation will be will be faster with increase in production. Let Y i denotes the total output produced at the end of i th period. Therefore total degraded water at the end of i th period is given by φ(y i ). Assuing i to be one, the total degradation at the end of first period is φ(y 1 ). So usable water available at the beginning of the second period is given by - - Ŵ- φ(y 1 ), (where Ŵ is the water purchased in the first period) Let us define a treatent technology such that if a unit of effluent water goes for treatent then η unit of treated water is obtained fro the process. It is assued that 0<η<1. If φ(y 1 ) aount of waste water is generated in period 1 then total water available at the beginning of period2 is given by Ŵ - φ(y 1 ) + η{φ(y 1 )} (where 0<η<1 ) Here η is defined as the degree of efficiency of the treatent process. The cost of setting up the treatent plant is defined as C = α + β φ(y) (1) (Where α denotes the fixed capital cost and β φ(y) the varying cost coponent of the total cost function. Here β denotes the unit cost of treatent of water.) The analysis starts with the production of yopic fir. The production function of the yopic fir in period1 defined as Y 1 = f 1 (W, L, K) (2) The cost function that the yopic fir faces is C = gl +rk + p w Ŵ (3) 7

8 Here g>0 is the wage rate, r>0 the rate of return to capital and p w >0 the unit cost of procuring water for production. Now given the production function and cost function the profit function is defined as π 1 = f 1 (W, L, K) (gl +rk + p w Ŵ) The constraint that the fir faces is that the degraded water cannot exceed the total water available during the first period. Therefore φ(y 1 ) - Ŵ (4) i.e. φ(y 1 ) Ŵ i.e. φ(f 1 (W, L, K)) Ŵ The Lagrange function for the yopic fir is given by L = f 1 (W, L, K) (gl +rk + p w Ŵ) + ν 1 (Ŵ φ(f 1 (W, L, K)) (5) Here ν 1 is Lagrange ultiplier and is defined as the shadow value of water in period 1. In (5) we replace φ(f 1 (W, L, K)) with F 1 (W, L, K). Following the definition of φ(y), F ' 1 (W, L, K) > 0 and F '' 1 (W, L, K) > 0. Now differentiating relation (5) with respect to W and equating it to zero (fro first order condition of axiisation) we have f 1 / W = ν 1 F 1 / W i.e. f ' 1 (W, L, K) = ν 1 F ' 1 (W, L, K) i.e. ν 1 = f ' 1 (W, L, K) / F ' 1 (W, L, K) (6) For period 2 the profit function of yopic fir is given by π 2 = f 2 (W, L, K) (gl +rk) (7) Again in period 2 the degradation of water cannot exceed the total water available. Therefore Ŵ φ(f 1 (W, L, K)) φ(f 2 (W, L, K)) Now replacing φ(f 1 (W, L, K)) by F 1 (W, L, K) and φ(f 2 (W, L, K)) by F 2 (W, L, K) we have Ŵ F 1 (W, L, K) F 2 (W, L, K) (8) The Lagrange function is given by 8

9 L = f 2 (W, L, K) (gl +rk) + ν 2 [Ŵ F 1 (W, L, K) - F 2 (W, L, K)] (9) ν 2 is the shadow price of water in period 2. Differentiating (9) with respect to W and equating with respect to zero we have f 2 / W = ν 2 F 2 / W f ' 2 (W, L, K) = ν 2 [F ' 1 (W, L, K) + F ' 2 (W, L, K)] i.e. ν 2 = f ' 2 (W, L, K)/ [F ' 1 (W, L, K) + F ' 2 (W, L, K)] (10) Assuing arginal product of water and the rate of degradation of water to be sae (i.e F ' 1 (W, L, K) = F ' 2 (W, L, K)) in both the periods, equations (10) takes the following for as ν 2 = f ' 1 (W, L, K)/ [2F ' 1 (W, L, K)] (11) Coparing equations (6) and (11) it is evident that shadow price of water in period 2 is less than period 1. Now what is the definition of shadow price in our case. It is the rate at which the profit will increase when there is a unit relaxation in the constraint i.e. ore availability of water for production. This rate is less in the period two copared to period 1. Because of the non-availability of proper treatent facility, less water is available in period two thus reducing the scope of increased production and profit. Next we consider the visionary firs production process. We have defined a visionary fir as a fir who discounts the future period s profit in the current period. We define the production functions for the visionary fir in period 1 and 2 as v v v v Y 1 = f 1 (W, L, K) and Y 2 = f 2 (W, L, K). The profit functions for the fir be defined as π v v 1 = f 1 (W, L, K) (gl +rk + p w Ŵ) π v v 2 = f 2 (W, L, K) (gl +rk) Given that the fir is visionary in nature, it discounts the second period s profit in the period 1 and hence the total profit function in period 1 is given by = π 1 + π 2 / (1+ρ), (ρ being the discount factor). The constraint that the fir faces is that the degraded water cannot exceed the total water available during the first period. Therefore φ(y 1 ) - Ŵ 0 9

10 i.e. φ(y 1 ) Ŵ v i.e. φ(f 1 (W, L, K)) Ŵ In period 1 the visionary fir s Lagrange function is given by v v L = π 1 + π 2 / (1+ρ) + ν 1 (Ŵ - F 1 (W, L, K)) (12) L/ W = 0 (axiising condition) v v Therefore, π 1 / W + π 2 / W* (1/1+ρ) = ν 1 F ' 1 (W, L, K) v v i.e. [ π 1 / W + π 2 / W* (1/1+ρ)] / F ' 1 (W, L, K) = ν 1 i.e. ν v 1 = [(2+ρ)/(1+ρ)]( f ' 1 / F ' 1 ) (13) Coparing the shadow value in (13) with that of (6) and (11) and assuing sae functional fors for production and water degradation functions, we see that shadow value for the visionary fir is greater than the yopic fir. In other words a unit relaxation in the constraint i.e. ore availability of water, will result in an increase in the profit rate of the visionary fir copared to that of the yopic fir. Till now we haven t discussed the treatent process and costs for the visionary fir. Let us assue that the visionary fir invests for setting up a treatent plant at the beginning of period1. We have defined the production functions for the visionary fir in period 1 and 2 as v v v v Y 1 = f 1 (W, L, K) and Y 2 = f 2 (W, L, K). The different costs that the fir faces in the production process are labour cost, capital costs and the water treatent costs. The initial capital investent for water treatent at the beginning of period 1 is defined as α. Hence the total treatent cost in period 1 is v v v v given by α + β*f 1 (W, L, K) and in period 2 as β*f 2 (W, L, K), where F 1 and F 2 are the total degraded water in period 1 and 2 respectively. The total profit functions in different periods are as follows π v v v 1 = f 1 (W, L, K) (gl +rk + p w Ŵ) - α - β*f 1 (W, L, K) (14) π v v v 2 = f 2 (W, L, K) (gl +rk) - β*f 2 (W, L, K) (15) As already entioned, the fir is visionary in the sense that it discounts the second period s profit in the period 1. So the total profit function in period 1 is given by = π

11 π 2 / (1+ρ), (where ρ is the discount factor). The constraint that the visionary fir faces in period 1 is that the total treated water cannot exceed the initial water available. There fore ηφ(y 1 ) - Ŵ 0 i.e. ηφ(y 1 ) Ŵ v i.e. η F 1 (W, L, K) Ŵ (16) In period 1 the visionary fir s Lagrange function is given by v v L = π 1 + π 2 / (1+ρ) + ν 1 (Ŵ - η F 1 (W, L, K)) L/ W = 0 v v π 1 / W + π 2 / W* (1/1+ρ) = ν 1 η F ' 1 (W, L, K) v v ν 1 = [ π 1 / W + π 2 / W* (1/1+ρ)] / η F ' 1 (W, L, K) (17) Taking derivates of equations (14) and (15) and putting in (17) gives us v ν 1 = [{f ' 1 + (f ' 2 /(1+ρ))} - β{ F ' 1 + (F ' 2 /(1+ρ))}] / η F ' (18) Assuing f 1 = f 2, F ' 1 = F' 2 we have v ν 1 = [{(2+ρ)/(1+ρ)}* f ' 1 *(1/ F ' 1 ) *(1/ η )- (β/η) {(2+ρ)/(1+ρ)}] v ν 1 = (2+ρ)/(1+ρ)* (1/ η ) { (f ' 1 / F ' 1 ) - β } So fro the odel we have the following shadow values, which are For the yopic fir we have ν 1 = f ' 1 (W, L, K) / F ' 1 (W, L, K). (period 1) ν 2 = f ' 1 (W, L, K)/ [2F ' 1 (W, L, K)]..(period 2) For the visionary fir we have two set of shadow values which are ν 1 v = [(2+ρ)/(1+ρ)]( f ' 1 / F ' 1 ) ( With no water treatent costs) ν 1 v = (2+ρ)/(1+ρ)* (1/ η ) { (f ' 1 / F ' 1 ) - β }(With water treatent costs) 11

12 As η < 1 and {(2+ρ)/(1+ρ) * ( f ' 1 / F ' 1 )} is greater than (f ' 1 / F ' 1 ) ν 1 > ν 2, ν 1 v > ν 1 and ν 1 v > ν 2.(A) However in case of the visionary fir we have two cases where (2+ρ)/(1+ρ)* (1/ η ) { (f ' 1 / F ' 1 ) - β }> [(2+ρ)/(1+ρ)]( f ' 1 / F ' 1 ) or (2+ρ)/(1+ρ)* (1/ η ) { (f ' 1 / F ' 1 ) - β }< [(2+ρ)/(1+ρ)]( f ' 1 / F ' 1 ) η < (1 - β* {F ' 1 / f ' 1 }) or η > (1 - β* {F ' 1 / f ' 1 }) (B) The equilibriu value of η would be- η = 1 - β* {F ' 1 / f ' 1 } So the odel shows that we could have differences aongst the shadow values of the visionary firs depending on the fir specific factors of treatent costs, arginal cost of treating water, nature of production and arginal productivity (relation B above). 4.1 Econoic Explanation of the inequality (A) The yopic fir (in coparison to the visionary fir) does not use the inputs efficiently and degrades the water level and hence effects the water quality too which is shown by the shadow price of the water quantity. The reduction in the value of the shadow value of the yopic fir shows that the production of the yopic fir is not done efficiently and with the objective of profit axiization the fir uses ore water inputs and degrades the water quantity and water quality too there by creating an ipact on the sustainability of environent as an outcoe of the profit axiizing objective which raises the scope for regulation for these yopic firs. 12

13 5. Analysis of the result: The results above shows that the shadow price of the yopic fir in period 2 is lesser than the shadow price of the yopic fir in period 1. This iplies that the benefit for each unit of resource exhaustion is lesser for the yopic fir in the period 2 copared to period 1. For the visionary fir without treatent the shadow value is higher (higher scarcity rent) iplying lower use of water and higher benefit in coparison to the water use. However the interesting observation, which arises, is in the case of visionary fir with treatent, which shows a lower shadow value of water. This iplies higher use of water as the sae water is treated (iplying less ipact on the resource pollution) and used. This increases the arginal cost at a proportionately higher rate in coparison to the revenue iplying an increase in the profit at a decreasing rate. Hence in this case the profit goes up (at a decreasing rate) but the resource exhaustion, pollution is less as well as the scarcity created by the production process on the resource is less. This eans there is a higher social welfare in case where the visionary fir incurs a treatent cost through installation of treatent plant. The next section discusses soe of the ways of how such resource pollution, exhaustion could be regulated through non andatory approaches to regulation by creating peer pressure through inforation disseination in the stock arket. 6. Corollary to the Model: Way to Non Mandatory Approaches to Regulation to control fir behavior regarding pollution The above results clearly bring out soe interesting results with regard to regulation. The theoretical odel shows that in case of the visionary fir with a treatent facility (hence incurring a treatent cost) the profit goes up but the resource exhaustion, pollution is less as well as the scarcity created by the production process on the resource is less thereby generating a higher social welfare. Thus the objective of the regulator could be to attain this state where firs are being incentivized or peer pressured to attain this state where there is a higher social welfare. One of the ways of doing it is by through disseination of inforation of fir regarding their resource use and exhaustion and also the ipact of the fir behavior on the resource pollution. The firs could be incentivized to behave 13

14 like the visionary fir with the treatent facility in our odel by indexing their stock arket share value to the behavioural patterns of the fir with regard to resource pollution and exhaustion. The previous epirical literature on why firs pollute has focused on the question of whether or not the firs coply with the governent regulatory standards. The theory dealing with the linkage between the probability of a fir coplying with environental regulation and the probability of being detected and being penalized for non copliance has shown that in the context of environental regulation specifically dealing with pollution control the polluting firs respond to arginal incentives like higher penalties and ore onitoring and enforceent. The non andatory approach to environental regulation deals with the voluntary copliance of the polluting firs where peer pressure fro the shareholders of the polluting fir, public pressure through inforation disseination could create a copliance situation where the firs would voluntarily coply to the environental standards being set by the pollution control agency. The odel developed here could be linked to the voluntary copliance echaniss of the firs with regard to environental regulation. The econoic instruents (shadow prices) derived through the odeling would act as the basic source of inforation, a signal of the level of perforance of the fir, and could be considered for environental pollution copliance. Basically the econoic instruents (the shadow prices) that cae out of the odel would be the basic source of inforation in designing and bencharking the perforance level of the polluting firs. The power of inforation would thereby create a pressure on the firs to voluntarily coply with the environental standards. It has been seen that in case of large publicly traded copanies it is in the shareholder s interest that the pollution is reduced voluntarily by the firs. Harford (1994) 4 has stated individual diversification of assets aong firs dilutes each person s financial gain fro a fir s pollution. However this theory of shareholder s pressure and public pressure on the voluntary copliance of firs with environental standards and regulation has been tried in U.S.A for long. In 1986 Congress passed the Eergency Planning and Counity Right to Know Act requiring the anufacturing establishents to publicly disclose the quantity and quality 4 Harford, Jon D., Fir Ownership Patterns and Motives for Voluntary Pollution Control, 18 Journal of Managerial and Decision Econoics, pgs ,

15 of toxic cheicals released into the environent. Research on Toxic Release Inventory (TRI) by Hailton (1995) 5 has showed that publicly traded firs reporting TRI releases in the stock arket experienced statistically significant negative abnoral stock returns. The iplication of the drop in stock return was because of the drop in the stock prices. The reason behind a drop in the stock prices was found to be investors updating their expectation of future pollution -related expenditures or liabilities (e.g. expecting a higher probability of future risk of regulation and exposure to other regulatory easures) which would reduce the fir s future profitability. A study by Konar and Cohen (1997) 6 on effect of stock price reductions on fir behaviour because of disclosure of pollution eission shows that a significant stock price reduction upon disclosing TRI eissions reduced the eissions of the firs disclosing the inforation copared to their peers. The pertinent question which arises is that why would a fir be concerned and worried about the release of inforation related to its environental perforance. The literature on this aspect has shown that larger firs having ore reputation capital are bound to loose in the event of bad environental publicity. Moreover larger fars are often biggest polluters of the resources too. The larger and ore reputed the fir is it would be subject to greater public scrutiny by counity and the public interest groups. The firs would have ore at stake considering the effect of the negative publicity. This can be in the for of an expanding fir, which ay find that their environental reputation affects their ability to obtain favorable zoning and tax treatents when they ove into new areas of location for operation. Thus it has been seen that ceteris paribus, larger firs are ore likely to reduce eissions subsequent to being required to release inforation to the public about their toxic eissions. This odel ais to address that the shadow prices derived fro the odeling fraework would be used in deriving a disclosure inforation linked to the stocks of the firs trading in the stock arket and the shadow price would be a signal which would create a peer pressure for the water resource degrading and polluting firs to perfor in a ore efficient anner in ters of balancing its production with the resource degradation and pollution. This inforation disseination would hence 5 Jaes T. Hailton, Pollution as News: Media and Stock Market Reactions to the Toxic Release Inventory Data, 28 Journal of Environental Econoics and Manageent, pg. 98, Konar, Shaeek and Mark A. Cohen, Inforation as Regulation: The Effect of Counity Right to know Laws on Toxic Eissions, 32 Journal of Environental Econoics and Manageent, Pgs (1997) 15

16 provide a pathway towards sustainable developent. The literature on the voluntary copliance and non andatory approaches to environental regulation has shown that fir level pollution varies because of both fir specific factors (such as age of fir assets, financial liability of firs) and fir level incentives (such as counity pressures or effect on brand nae reputation). It has been seen fro the literature 7 that the largest firs are ost likely to reduce eissions in response to the disclosure of the inforation regarding environental perforance of the firs in the stock arket. The literature on this has shown that financial ability of the firs also plays an iportant role in the environental perforance of the firs as firs constrained with cash flow positions are often least likely to coply with the environental regulation which thereby iparts a negative ipact on the environentally sustainable perforance of the firs. The paper hence addresses that one of the ways of creating a voluntary copliance for the water polluting and water using firs would be to link the share price value of these water using polluting firs to the shadow prices derived fro the odel which would be a signal of inforation to the public about the environental perforance and the efficiency level of the firs with respect to their profit axiization behaviour visa vis its effect on the environental resource (water) through quantity and quality degradation which is very iportant fro the perspective of new diensions of regulation for sustainable developent. 7. Conclusion: The paper addresses the iportant issue of regulating yopic and visionary firs through the use of econoic instruents in order to progress in the path of sustainable econoic developent. The paper illustrates about the differences in the shadow values of the two different types of fir (viz. yopic, visionary) which (shadow values) could be used in designing the regulatory econoic instruents. One way of it would be to link the share value (by bencharking) of the water using and water polluting firs in the stock arkets to the respective shadow values. The odel clearly illustrates that for visionary fir because of a favourable shadow price the share prices 7 Konar, Shaeek and Mark A. Cohen, Why do Firs Pollute (and Reduce) Toxic Eissions Background Docuent of Conference on Econoic Aspects of Environental Copliance Assurance, 2 nd 3 rd Deceber, 2004, PARIS, France 16

17 would be having a greater value in the stock arket copared to the yopic fir. But one interesting case which coes out is that within the section of the visionary firs as the shadow values ight differ because of fir specific different water treatent costs, fixed costs, arginal productivity it would have a chance to effect the share prices of the respective visionary firs in the stock arket also. This eans, as a corollary to the odel that the share prices of the visionary fir would be getting better valuation (ore public deand) copared to the yopic fir. But within the segent of the visionary firs the share prices would have differential valuation (differential deand of visionary fir shares), which would depend on fir specific cost structures and production perforance pertaining to use of input usage (like water) and its ipact on water degradation and water pollution. 17

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