Global emissions, regulatory competition and excess entry

Abstract This study presents a model that relates the efficiency of environmental regulatory competition to excess entry by firms. The two key results are as follows. First, when emissions remain localized, stringent environmental regulation leads to insufficient firm entry owing to negative external effects on the damage caused by emissions in other countries. Second, if emissions spill over globally, akin to CO causing global warming, the impact of emissions on welfare will be uniform across countries. In this case, the positive and negative external effects of tightening regulation cancel each other out, yielding the second‐best levels of regulation and firm entry.