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Calculating the Costs of Environmental Regulation

In: Handbook of Environmental Economics

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  • Pizer, William A.
  • Kopp, Raymond

Abstract

Decisions concerning environmental protection hinge on estimates of economic burden. Over the past 30 years, economists have developed and applied various tools to measure this burden. In this chapter, we present a taxonomy of costs along with methods for measuring those costs. At the broadest level, we distinguish between partial and general equilibrium costs. Partial equilibrium costs represent the burden directly borne by the regulated entity (firms, households, government), including both pecuniary and nonpecuniary expenses, when prices are held constant. General equilibrium costs reflect the net burden once all good and factor markets have equilibrated. In addition to partial equilibrium costs, these general equilibrium costs include welfare losses or gains in markets with preexisting distortions, welfare losses or gains from rebalancing the government's budget constraint, and welfare gains from the added flexibility of meeting pollution constraints through reductions in the use of higher-priced, pollution-intensive products. In addition to both partial and general equilibrium costs, we also consider the distribution of costs across households, countries, sectors, subnational regions, and generations. Despite improvements in our understanding of cost measurement, we find considerable opportunity for further work and, especially, better application of existing methods.

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This chapter was published in:

  • K. G. Mäler & J. R. Vincent (ed.), 2005. "Handbook of Environmental Economics," Handbook of Environmental Economics, Elsevier, edition 1, volume 3, number 3, June.
    This item is provided by Elsevier in its series Handbook of Environmental Economics with number 3-25.

    Handle: RePEc:eee:envchp:3-25

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    Cited by:
    1. David Maradan & Anatoli Vassiliev, 2005. "Marginal Costs of Carbon Dioxide Abatement: Empirical Evidence from Cross-Country Analysis," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 141(III), pages 377-410, September.
    2. Isabelle Piot-Lepetit & Monique Moing, 2007. "Productivity and environmental regulation: the effect of the nitrates directive in the French pig sector," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(4), pages 433-446, December.
    3. Parry, Ian, 2001. "On the Implications of Technological Innovation for Environmental Policy," Discussion Papers dp-01-44, Resources For the Future.
    4. Burtraw, Dallas & Pizer, William & Harrington, Winston & Sanchirico, James & Newell, Richard, 2005. "Modeling Economywide versus Sectoral Climate Policies Using Combined Aggregate-Sectoral Models," Discussion Papers dp-05-08, Resources For the Future.
    5. Parry, Ian, 2002. "Adjusting Carbon Cost Analyses to Account for Prior Tax Distortions," Discussion Papers dp-02-47, Resources For the Future.

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