Abstract
We explain why some firms voluntarily overcomply with environmental regulation. In our model all consumers value environmental quality but differ in their willingness to pay which depends on their income levels. Publicly available information on environmental performance of firms enables consumers to identify clean firms. Firms participate in a two-stage duopoly game where they first choose their levels of cleaning technology and next engage in price competition. The market gets segmented by income levels. A minimum standard binding on the dirty firm has the effect of improving the performance of the cleaner firm. A subsidy obtains the same competitive outcome.
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