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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.
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