Is the ban on BS-III vehicles really bad?

The Supreme Court’s recent ban on BS-III vehicles has sent the Indian auto industry into a tizzy. The Society of Indian Automobile Manufacturers has called the ban unfortunate and Tata Motors termed the move “unexpected and unprecedented”. Firms have announced that there might also be labour-market implications, with contractual labour especially feeling the pinch. But are these environmental bans really bad for the industry? To understand, one needs to appreciate that there is a short- and long-run aspect to this story and also that the dynamic gains in the long run might actually outweigh the static losses today.
In fact, prior scholarly research indeed points to such possibilities, especially if one considers a nuanced explanation of how regulation can actually encourage innovation (rather than mute it), following the classic debate on this issue provoked more than two decades ago by Harvard economist Michael Porter. Writing in 1995 in Journal Of Economic Perspectives, Porter and his co-author Van der Linde contested the traditional intuition that regulation is detrimental to innovation. Termed now as the controversial Porter’s hypothesis, they noted that in contrast, more stringent and properly designed environmental regulations can actually “trigger innovation that may partially or in some instances more than fully offset the costs of complying with them”.

The Porterian arguments arise from a few channels which follow-on research has examined and thereafter documented in various contexts in the EU and US, both empirically and theoretically. The first is a behavioural one in which researchers have supported the Porterian assertion by arguing that firms are composed of rationally bounded managers taking decisions on behalf of a profit-maximizing entity. They are therefore more likely to be present-biased, postponing investments on costly innovation for which benefits occur later. This strand of research therefore argues that an external environmental regulation could actually reduce the information asymmetry that is inherent in such principal-agent settings and promote innovation overlooking the rationally bounded manager.



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