Do Environmental Regulations Cause Firms to Exit the Market? Evidence from Underground Storage Tank (UST) Regulations

Abstract

This paper examines whether Underground Storage Tank (UST) regulations had uneven impacts on petroleum retail outlets, and explores the reasons why some outlets are more likely to exit the market than others under UST regulations. The analyses suggest that both the economies of scale and the liquidity constraints arguments can explain the uneven impact UST regulations had on different petroleum retail outlets. Economies of scale give large outlets a greater competitive advantage because it is more difficult for small outlets to pass on compliance costs to customers. Liquidity constraints make outlets owned by small firms more vulnerable to UST regulations because small firms do not have the financial capability to replace or upgrade equipment as required by UST technical standards. This suggests that small businesses have more difficulties competing with large businesses under environmental regulations.

Keywords: Environmental Regulations, Economies of Scale, Liquidity Constraints, Underground Storage Tank

JEL Classification: Q28, L51, D21