Estimating the Hidden Costs of Environmental Regulation

47 Pages Posted: 26 Feb 2001  

Satish Joshi

Michigan State University - Department of Agricultural Economics

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems

Lester Lave

Carnegie Mellon University - David A. Tepper School of Business (Deceased)

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Abstract

This paper examines the extent to which accounting systems separately identify all the costs of environmental regulation. We estimate the relation between the "visible" cost of regulatory compliance (costs that firms' accounting systems correctly classify as "environmental"), and "hidden" environmental costs 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 distort costs in firms subject to environmental regulation.

Keywords: costing systems, hidden costs, environmental regulation, environmental management

JEL Classification: M40, M46, L61, Q28

Suggested Citation

Joshi, Satish and Krishnan, Ranjani and Lave, Lester, Estimating the Hidden Costs of Environmental Regulation. Available at SSRN: https://ssrn.com/abstract=261508 or http://dx.doi.org/10.2139/ssrn.261508

Satish V. Joshi

Michigan State University - Department of Agricultural Economics ( email )

91 Agriculture Hall
East Lansing, MI 48824
United States
517-432-9802 (Phone)
517-432-1800 (Fax)

Ranjani Krishnan (Contact Author)

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-353-4687 (Phone)
517-432-1101 (Fax)

Lester B. Lave

Carnegie Mellon University - David A. Tepper School of Business (Deceased)

N/A

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