Market Failure and the Environmental Policies of Firms: Economic Rationales for “Beyond Compliance” Behavior

Abstract

Summary: This paper is an inquiry into the circumstances under which the voluntary provision of environmental public goods might be sensible from a firm's point of view. If environmental externalities were the only departure from the economic assumptions of perfect competition, and if no firms had preferential access to superior (low‐cost) stocks of natural resources, firms that volunteered to internalize costs could not survive. But because externalities coexist with other departures from the competitive paradigm, such as asymmetric information and oligopoly competition, firms may find it in their shareholders' interests to provide environmental public goods to a greater degree than required by law. A number of firms, especially in Europe and North America, assert that they are pursuing “beyond‐compliance” environmental policies. From the perspective of a firm's shareholders, it makes sense to pursue such policies if they increase the firm's expected value or if they appropriately manage business risk. This paper discusses economically rational explanations for such policies. It analyzes the ways in which a firm's chances of financial success in pursuing any one of them are influenced by the firm's market position and organizational capabilities and by the basic structure of the industry in which it competes.