Conflicting Views: Neoclassical, Porterian, and Evolutionary Approaches to the Analysis of the Environmental Regulation of Industrial Activity

The current European Union approach to environmental regulation aims to ensure that firms achieve continuous improvement in environmental performance and explicitly encourages firms to integrate environmental concerns into production technology. Such approaches to minimizing pollution often lead to economic as well as environmental benefits. The possibility that regulation can generate a win solution, achieving both environmental protection and economic gains, is rejected by neoclassical environmental economists. Using the neoclassical model of a profit-maximizing firm with perfect information, neoclassical environmental economists argue that profit-maximizing cleaner technology will be adopted by profit-maximizing firms without requiring a regulatory stimulus: regulation can only act as a constraint on firms. Both this argument and its underpinning theory of the firm have been challenged by Michael Porter and Claus van der Linde (Porter 1991; Porter and van der Linde 1995a, 1995b), who have argued that regulation can promote competitiveness-enhancing technical change. Companies operate in the real world of dynamic competition, not in the static world of much economic theory. They are constantly finding innovative solutions to pressures of all sorts-from competitors, customers, and regulators (1995a, 120). Porterian firms cannot pursue profit-maximizing behavior; they face problems of information, control, and organizational inertia. With this conception of the firm there is a role for regulation in directing the attention of firms: strict product regulations can