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Costs of Air Quality Regulation

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  • Randy A Becker
  • Vernon Henderson

Abstract

This paper explores some costs associated with environmental regulation. We focus on regulation pertaining to ground-level- ozone (O) and its effects on two manufacturing industries - industrial organic chemicals (SIC 2865-9) and miscellaneous plastic products (SIC 308). Both are major emitters of volatile organic compounds (VOC) and nitrogen oxides (NO), the chemical precursors to ozone. Using plant-level data from the Census Bureau's Longitudinal Research Database (LRD), we examine the effects of regulation on the timing and magnitudes of investments by firms and on the impact it has had on their operating costs. As an alternative way to assess costs, we also employ plant-level data from the Pollution Abatement Costs and Expenditures (PACE) survey. Analyses employing average total costs functions reveal that plants' production costs are indeed higher in (heavily-regulated) non-attainment areas relative to (less-regulated) attainment areas. This is particularly true for younger plants, consistent with the notion that regulation is most burdensome for new (rather existing) plants. Cost estimates using PACE data generally reveal lower costs. We also find that new heavily-regulated plants start out much larger than less-regulated plants, but then do not invest as much. Among other things, this highlights the substantial fixed costs involved in obtaining expansion permits. We also discuss reasons why plants may restrict their size.

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File URL: ftp://ftp2.census.gov/ces/wp/1999/CES-WP-99-09.pdf
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 99-9.

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Date of creation: Jul 1999
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Handle: RePEc:cen:wpaper:99-9

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

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References

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  1. Henderson, J Vernon, 1996. "Effects of Air Quality Regulation," American Economic Review, American Economic Association, vol. 86(4), pages 789-813, September.
  2. 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.
  3. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
  4. Adam B. Jaffe et al., 1995. "Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 132-163, March.
  5. repec:fth:harver:1487 is not listed on IDEAS
  6. Levinson, Arik, 1996. "Environmental regulations and manufacturers' location choices: Evidence from the Census of Manufactures," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 5-29, October.
  7. Randy Becker & Vernon Henderson, 2000. "Effects of Air Quality Regulations on Polluting Industries," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 379-421, April.
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