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The Porter Hypothesis refers to the idea that environmental regulations
push firms into developing and adopting new technologies. Controversially,
it asserts that the investments in new technology that the firms
are pushed into making would be profitable irrespective of whether
the regulations had have been put in place. In this paper a simple
model is used to illustrate a Porter Hypothesis situation. This
framework allows us to establish what conditions are required
for a tariff reduction to be an alternative to environmental regulations.
That is, we look at a case where, under tariff protection, the
firm will only invest in new technology when the environmental
regulation is put in place, but in the absence of tariffs, the
firm will invest in new technology irrespective of whether the
environmental regulation is in place. |