PERC Policy Series: PS-41, August 2007

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Do Profits Promote Pollution?

The Myth of the Environmental Race to the Bottom (No. 41)

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By Robert K. Fleck and F. Andrew Hanssen

Summary

Environmentalists, politicians, and scholars express concern about a "race to the bottom" in environmental policy. They fear that competition between countries (or states or cities) for firms and investment may lead to excessively lax environmental standards. Yet economic theory indicates that a race to the bottom in environmental policy is highly unlikely, and there is little evidence that such races have, in fact, occurred.

In "Do Profits Promote Pollution? The Myth of the Environmental Race to the Bottom," PERC Julian Simon Fellows Rob Fleck and Andy Hanssen argue that the greatest threat to the environment arises not from apocryphal "races to the bottom," but rather from governments that fail to act in the interests of their citizens. Representative governments, even if they are competing for firms, will not engage in an environmental race to the bottom. By contrast, unrepresentative governments, even if they are not competing for firms, often implement overly lax environmental standards. Understanding the difference is crucial to good policy making.

F. Andrew Hanssen is professor of economics at Montana State University. His areas of research include institutions, law and economics, political economy, and industrial organization. Before getting a Ph.D., he was a management consultant, working in Europe, Latin America, and the Far East.

Robert K. Fleck is associate professor of economics at Montana State University. His research combines theoretical and statistical analysis, and his major fields of interest include political economy, public finance, economic history, and development economics.

"Progress toward improving our environment cannot solely rely on environmental regulations."