Technical Change, External Economies, and the Porter Hypothesis

Michael Porter introduces the idea that environmental regulations may benefit affected firms. This paper derives results consistent with Porterʹs hypothesis by employing a general equilibrium framework with a large number of agents, external economies of scale in production, and discrete changes in technology. The model shows that endogenous technical change makes Porterʹs hypothesis feasible. However, a policy that produces results consistent with Porterʹs hypothesis is not necessarily optimal.