The equilibrium effects of environmental regulation on heterogeneous competing firms: Theory and evidence from Chinese manufacturing

Ruizhi Pang, Xuping Zhang, Matthew Leisten and Zhongqi Deng

International Journal of Industrial Organization, 2025, vol. 100, issue C

Abstract: Environmental regulation has the potential to reshape market competition, thereby influencing the market power of regulated firms and potentially impacting social welfare. We show that in certain scenarios, both high-pollution and low-pollution firms may respond to environmental regulation by reducing overall output, thereby increasing price-marginal cost markups. This approach allows them to transfer some of the regulatory costs onto consumers. However, well-designed and appropriately implemented environmental regulations can still increase social welfare. Our empirical analysis of Chinese manufacturing firms supports this assertion, indicating that environmental regulations in China lead to an increase in markups while simultaneously reducing the welfare losses caused by markups.

Keywords: Environmental regulations; Markups; Social welfare (search for similar items in EconPapers)
JEL-codes: L13 L53 Q58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:100:y:2025:i:c:s016771872500027x

DOI: 10.1016/j.ijindorg.2025.103161

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