Environmental Regulation through Voluntary Agreements

Voluntary agreements with polluting industries are becoming a popular alternative to traditional environmental regulation. One reason may be that voluntary agreements can reduce compliance costs of polluting industries. In this paper we develop a family of simple policy formulation and implementation models enabling us to formally characterize the policy environments that make voluntary agreements possible. The main message of this paper is one of caution. Voluntary agreements that increase compliance costs and reduce social welfare can not be ruled out. The analyses also suggests that giving the legislative branch of government an effective power of veto reduces (but does not eliminate) the possibility of welfare reducing voluntary agreements