Threat Positions and the Resolution of Environmental Conflicts

Abstract

In the classic externality problem of one polluting firm and a passive victim we consider bargaining when the firm has the prior right to pollute. Assuming that a threat made prior to bargaining is perceived to be credible, the firm will commit itself to an output level that is higher than both the efficient and profit-maximizing levels. In an extension, we assume that the firm makes an irreversible investment in production capability to give its threat credibility. We show that a credible investment must be greater than or equal to the profit-maximizing investment.