Costs of Air Quality Regulation

37 Pages Posted: 4 Apr 2000 Last revised: 5 May 2000

See all articles by Randy A. Becker

Randy A. Becker

U.S. Census Bureau - Center for Economic Studies

J. Vernon Henderson

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER)

Date Written: August 1999

Abstract

This paper explores some costs associated with environmental regulation. We focus on regulation pertaining to ground-level ozone (O3) 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 (Nox), 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 cost 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 than existing) plants. Cost estimates using PACE data generally reveal lower costs. We also find that new heavily-regulated plants start our 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.

Suggested Citation

Becker, Randy A. and Henderson, J. Vernon, Costs of Air Quality Regulation (August 1999). NBER Working Paper No. w7308, Available at SSRN: https://ssrn.com/abstract=198049

Randy A. Becker

U.S. Census Bureau - Center for Economic Studies ( email )

4600 Silver Hill Road
Washington, DC 20233
United States

J. Vernon Henderson (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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