Emission Standards and Stochastic Waste Load

Empirical work regarding the impact of environmental regulations on firm behavior has been developed under the assumption that emissions of pollutants are deterministic. The implication is that the regulation is effective only when the constraint is exactly satisfied. In real life, however, it is seldom the case that emission constraints are exactly satisfied. The purpose of this paper is to find out whether regulation schemes are ineffective, or whether the structure is an optimal reaction to random fluctuations in emissions. The Swedish pulp and paper industry is used as an empirical illustration.