Environmental Regulation and R&D Incentives

This report documents a newly developed model of the incentives for private investment in new technology, and shows how the model can be used to examine the effects of existing-product regulations on technological change. The report uses the chlorofluorocarbon emissions regulatory scenario as a reference case for exploring the ways in which RAND's R&D model can be used to evaluate alternative forms of regulation. The model is developed in Sec. II, and some extensions are considered in Sec. III. The model offers insights beyond those strictly related to the regulations under investigation. The regulations discussed in Sec. IV — mandatory controls, excise taxes, and production quotas — are widely recognized alternatives for controlling environmental hazards. Section V shows how to use the analytic results to evaluate regulatory effects on several key classes of innovations, including the development of nonregulated products. Finally, Sec. VI summarizes the findings and discusses their implications for welfare analysis.