Environmental Protection Versus Economic Development: A False Trade‐Off?

Is a trade‐off between the social benefits of regulation and the economic benefits of development inevitable? We argue that environmental regulation may deter economic growth in some contexts, however, in other contexts the benefits of regulation may be obtained with little or no economic loss. We develop an explanation of the economic impacts of state environmental policy based on a model of public influence on private resource allocation decisions. In this model, we assume utility‐maximizing firms will make investment choices based upon the projected profits on their investments and their willingness to accept the risk associated with the investments. We assert that state policies and administrative institutions influence perceptions of risk by increasing or decreasing uncertainty over future environmental policy and influence return on investments at particular locations by affecting firm‐level production costs. Our results confirm that certain administrative arrangements for environmental regulation may enhance, rather than impede, economic development.