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Estimating the Hidden Costs of Environmental Regulation

  • Satish Joshi
  • Ranjani Krishnan
  • Lester Lave

This paper examines whether accounting systems identify all the costs of environmental regulation. We estimate the relation between the “visible” cost of regulatory compliance, i.e., costs that are correctly classified in firms’ accounting systems, and “hidden” costs i.e., costs that are embedded in other accounts. We use plant-level data from 55 steel mills to estimate hidden costs, and we follow up with structured interviews of corporate-level managers and plant-level accountants. Empirical results show that a $1 increase in the visible cost of environmental regulation is associated with an increase in total cost (at the margin) of $10-11, of which $9-10 are hidden in other accounts. The findings suggest that inappropriate identification and accumulation of the costs of environmental compliance are likely to lead to distorted costs in firms subject to environmental regulation.

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File URL: ftp://ftp2.census.gov/ces/wp/2002/CES-WP-02-10.pdf
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Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 02-10.

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Date of creation: May 2002
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Handle: RePEc:cen:wpaper:02-10
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  1. Byron, Ray P & Bera, Anil K, 1983. "Least Squares Approximations to Unknown Regression Functions: A Comment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 255-60, February.
  2. 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.
  3. Wayne B. Gray & Ronald J. Shadbegian, 1993. "Environmental Regulation and Manufacturing Productivity at the Plant Level," NBER Working Papers 4321, National Bureau of Economic Research, Inc.
  4. Jorgenson, D.W., 1992. "Tax Reform and the Cost of Capital : An International Comparison," Harvard Institute of Economic Research Working Papers 1621, Harvard - Institute of Economic Research.
  5. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
  6. Guilkey, David K & Lovell, C A Knox & Sickles, Robin C, 1983. "A Comparison of the Performance of Three Flexible Functional Forms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 591-616, October.
  7. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
  8. 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.
  9. Gray, Wayne B, 1987. "The Cost of Regulation: OSHA, EPA and the Productivity Slowdown," American Economic Review, American Economic Association, vol. 77(5), pages 998-1006, December.
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