The impact of firm-firm externalities on environmental standard

A model of two industries (sectors) in one economy, in which a sectorʹs production suffers from the other sectorʹs pollution emission, is presented to determine the optimal regulatory emission standard and to contrast the gap between the two versions: in the presence and absence of firm-firm damage effect. The discrepancy of the emission standard setting is surely existent in the presence of firm-firm externalities compared with in the absence of those. The results reveal that the planned output of polluting industry is higher in the presence of firm-firm damage effect than in the absence, but that of nonpolluting industry depends on demand elasticity and damage function.