We identify and analyse several dynamic implications of setting environmental standards such as to ‘balance’ marginal costs
and benefits. The adoption of such a regulatory approach is shown to effect (i) the speed of improvement of abatement technologies;
(ii) the ‘direction’ (in a sense to be defined) of that improvement; (iii) its source and the distribution of the rents from
it; and (iv) the rate of development of defensive (averting) technologies. Existing views are thoroughly synthesised in the
context of a simple diagrammatic model, several new results are derived and at least one conventional wisdom questioned. The
message of the analysis for legislators and regulators is that cost-benefit balancing should be done with care.
Key words environmental regulation - cost-benefit analysis - technical change
The authors are grateful to Robert Cairns, Ngo van Long, Sandeep Kapur, Dennis Snower and seminar participants at the Universities
of London and Oxford, two referees and an editor of this journal for extremely helpful comments on earlier versions. All errors
are ours.