Advanced Search
MyIDEAS: Login to save this paper or follow this series

Are We Overstating the Economic Costs of Environmental Protection?

Contents:

Author Info

  • William A Pizer
  • Jhih-Shyang Shih
  • Richard D Morgenstern

Abstract

Reported expenditures for environmental protection in the U.S. are estimated to exceed $150 billion annually or about 2% of GDP. This estimate is often used as an assessment of the burden of current regulatory efforts and a standard against which the associated benefits are measured. This makes it a key statistic in the debate surrounding both current and future environmental regulation. Little is known, however, about how well reported expenditures relate to true economic cost. True economic cost depends on whether reported environmental expenditures generate incidental savings, involve uncounted burdens, or accurately reflect the total cost of environmental protection. This paper explores the relationship between reported expenditures and economic cost in a number of major manufacturing industries. Previous research has suggested that an incremental $1 of reported environmental expenditures increases total production costs by anywhere from $1 to $12, i.e., increases in reported costs probably understate the actual increase in economic cost. Surprisingly, our results suggest the reverse, that increases in reported costs may overstate the actual increase in economic cost. Our results are based a large plant-level data set for eleven four-digit SIC industries. We employ a cost-function modeling approach that involves three basic steps. First, we treat real environmental expenditures as a second output of the plant, reflecting perceived environmental abatement efforts. Second, we model the joint production of conventional output and environmental effort as a cost-minimization problem. Third, we calculate the effect of an incremental dollar of reported environmental expenditures at the plant, industry, and manufacturing sector levels. Our approach differs from previous work with similar data by considering a large number of industries, using a cost-function modeling approach, and paying particular attention to plant-specific effects. Our preferred, fixed-effects model obtains an aggregate estimate of thirteen cents in increased costs for every dollar of reported incremental pollution control expenditures, with a standard error of sixty-one cents. This single estimate, however, conceals the wide range of values observed at the industry and plant level. We also find that estimates using an alternative, random-effects model are uniformly higher. Although the higher, random-effects estimates are more consistent with previous work, we believe they are biased by omitted variables characterizing differences among plants. While further research is needed, our results suggest that previous estimates of the economic cost associated with environmental expenditures have been biased upward and that the possibility of overstatement is quite real. Key words: environmental costs, fixed-effects, translog cost model

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: ftp://ftp2.census.gov/ces/wp/1997/CES-WP-97-12.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 97-12.

as in new window
Length:
Date of creation: May 1997
Date of revision:
Handle: RePEc:cen:wpaper:97-12

Contact details of provider:
Postal: 4600 Silver Hill Road, Washington, DC 20233
Phone: (301) 763-6460
Fax: (301) 763-5935
Email:
Web page: http://www.census.gov/ces
More information through EDIRC

Related research

Keywords: CES; economic; research; micro; data; microdata; chief; economist;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Deily, Mary E. & Gray, Wayne B., 1991. "Enforcement of pollution regulations in a declining industry," Journal of Environmental Economics and Management, Elsevier, vol. 21(3), pages 260-274, November.
  2. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, Econometric Society, vol. 46(1), pages 69-85, January.
  3. Wayne B Gray & Ronald J Shadbegian, 1994. "Pollution Abatement Costs, Regulation And Plant-Level Productivity," Working Papers, Center for Economic Studies, U.S. Census Bureau 94-14, Center for Economic Studies, U.S. Census Bureau.
  4. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier, Elsevier.
  5. Nelson, Randy A & Tietenberg, Tom & Donihue, Michael R, 1993. "Differential Environmental Regulation: Effects on Electric Utility Capital Turnover and Emissions," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 368-73, May.
  6. Jorgenson, D.W., 1992. "Tax Reform and the Cost of Capital : An International Comparison," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1621, Harvard - Institute of Economic Research.
  7. Timothy J. Bartik, 2010. "Small Business Start-Ups in the United States: Estimates of the Effects of Characteristics of States," Book chapters authored by Upjohn Institute researchers, W.E. Upjohn Institute for Employment Research, in: Zolton Acs (ed.), Entrepreneurship and regional Development, pages 155-169 W.E. Upjohn Institute for Employment Research.
  8. Bailey, Elizabeth E & Friedlaender, Ann F, 1982. "Market Structure and Multiproduct Industries," Journal of Economic Literature, American Economic Association, vol. 20(3), pages 1024-48, September.
  9. Diewert, Walter E & Wales, Terence J, 1987. "Flexible Functional Forms and Global Curvature Conditions," Econometrica, Econometric Society, Econometric Society, vol. 55(1), pages 43-68, January.
  10. Levinson, Arik, 1996. "Environmental regulations and manufacturers' location choices: Evidence from the Census of Manufactures," Journal of Public Economics, Elsevier, Elsevier, vol. 62(1-2), pages 5-29, October.
  11. Hazilla, Michael & Kopp, Raymond J, 1990. "Social Cost of Environmental Quality Regulations: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(4), pages 853-73, August.
  12. Gruenspecht, Howard K, 1982. "Differentiated Regulation: The Case of Auto Emissions Standards," American Economic Review, American Economic Association, American Economic Association, vol. 72(2), pages 328-31, May.
  13. Gray, Wayne B, 1987. "The Cost of Regulation: OSHA, EPA and the Productivity Slowdown," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 998-1006, December.
  14. Barbera, Anthony J. & McConnell, Virginia D., 1990. "The impact of environmental regulations on industry productivity: Direct and indirect effects," Journal of Environmental Economics and Management, Elsevier, vol. 18(1), pages 50-65, January.
  15. Timothy J. Bartik, 2002. "The Effects of Environmental Regulation on Business Location in the United States," Book chapters authored by Upjohn Institute researchers, W.E. Upjohn Institute for Employment Research, in: Wayne B. Gray (ed.), Economic Costs and Consequences of Environmental Regulation, pages 129-151 W.E. Upjohn Institute for Employment Research.
  16. Virginia D. McConnell & Robert M. Schwab, 1990. "The Impact of Environmental Regulation on Industry Location Decisions: The Motor Vehicle Industry," Land Economics, University of Wisconsin Press, vol. 66(1), pages 67-81.
  17. Ulph, A., 1994. "Environmental policy and international trade: a survey of recent economic analysis," Discussion Paper Series In Economics And Econometrics 9423, Economics Division, School of Social Sciences, University of Southampton.
  18. Simpson, R. David & Bradford, Robert III, 1996. "Taxing Variable Cost: Environmental Regulation as Industrial Policy," Journal of Environmental Economics and Management, Elsevier, vol. 30(3), pages 282-300, May.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Carl Pasurka, 2001. "Technical Change and Measuring Pollution Abatement Costs: An Activity Analysis Framework," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 18(1), pages 61-85, January.
  2. Gale Boyd & George Tolley & Joseph Pang, 2002. "Plant Level Productivity, Efficiency, and Environmental Performance of the Container Glass Industry," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 23(1), pages 29-43, September.
  3. David Pearce & Charles Palmer, 2001. "Public and private spending for environmental protection: a cross-country policy analysis," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 22(4), pages 403-456, December.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cen:wpaper:97-12. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fariha Kamal).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.