Overcompliance with Endogenous Environmental Standards and Quantity Competition

We propose a model of environmental overcompliance where firms set the environmental quality of their products and compete in quantities, while the government imposes an environmental standard with the aim to maximise welfare. We show that all firms overcomply if the environmental impact of production is sufficiently low, otherwise unilateral overcompliance emerges by the firm with higher environmental quality. With price competition, the introduction of an environmental standard quality always brings about unilateral overcompliance.