Regulations that restrict pollution by firms also affect decisions about use of labor and capital. They thus affect relative factor prices, total production, and output prices. For non-revenue-raising environmental mandates, what are the general equilibrium impacts on the wage, the return to capital, and relative output prices? Perhaps surprisingly, we cannot find any existing analytical literature addressing that question. This paper starts with the standard two-sector tax incidence model and modifies one sector to include pollution as a factor of production that can be a complement or substitute for labor or for capital. We then look not at taxes but at four types of mandates, and for each mandate determine conditions that place more of the burden on labor or on capital. Stricter regulation does not always place less burden on the factor that is a better substitute for pollution. Also, a relative restriction on the amount of pollution per unit of output creates an "output-subsidy effect" on factor prices that can offset and reverse the traditional output effect and substitution effect. An analogous effect is found for a relative restriction on pollution per unit of capital.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13645.
Length: Date of creation: Nov 2007 Date of revision: Handle: RePEc:nbr:nberwo:13645
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Find related papers by JEL classification: H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Costs; Distributional Effects; Employment Effects
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