Costs of a Practice-Based Air Quality Regulation: Dairy Farms in the San Joaquin Valley

California dairy farms have experienced hard times in recent years. In addition to changes in market conditions in both input and output markets, the burden of environmental regulations has been mentioned as a culprit. This research estimates the costs of a practice-based air quality regulation for dairy farms in the San Joaquin Valley in California. Using farm-level cost data on a panel of dairy farms, I estimate the effects of the regulation on the costs of milk production with a difference-in-differences method. Different from ex ante analyses, my econometric results indicate that the air quality regulation has not significantly affected the total costs of milk production. Estimates from different specifications indicate that the regulation may have reduced feed costs, perhaps because some pollution-mitigation practices can reduce feed fermentation. The regulation has increased the costs of hired labor by about $0.15 per hundredweight of milk, which is equivalent to an 11% increase in the costs of hired labor for dairy farms facing the regulation. Moreover, unlike previous analyses of the effects of environmental regulations on agricultural production, I am able to observe the realized operational changes associated with abiding by this regulation. Calculated adoption rates of different pollution-mitigation practices using administrative data reveal that dairy farms have mainly adopted labor-intensive practices to comply with the air quality regulation.