Informal Regulation of Industrial Pollution in Developing Countries: Evidence from Indonesia

32 Pages Posted: 20 Apr 2016

See all articles by David Wheeler

David Wheeler

World Bank - Policy Research Department

Sheoli Pargal

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: February 1995


The pollution intensity of emissions is much higher for plants located in poorer, less-educated communities than in richer, better educated ones. This difference appears to be too large to reflect preferences alone. Differential ability to pressure polluting firms may also be important.

Pargal and Wheeler test a model of supply-demand relations in an implicit market for environmental services when formal regulation is absent.

They use plant-level data from Indonesia for 1989 - 90, before the advent of nationwide environmental regulation. Treating pollution as a derived demand for environmental services, their model relates emissions of biological oxygen demand to the price (expected cost) of pollution; to prices of other inputs (labor, energy, materials); and to enterprise characteristics that may affect pollution demand, including scale, vintage, ownership, and efficiency.

The price of pollution is determined by the intersection of plant-level demand and a local environmental supply function, enforced by community pressure or informal regulation. Environmental supply is affected by community income, education, the size of the exposed population, the local economic importance of the plant, and its visibility as a polluter.

Their results are strongly consistent with the existence of an informal pollution equilibrium. Pollution intensity declines with increases in plant size, efficiency, and local materials prices. Older plants and publicly owned facilities are more pollution-intensive; multinational ownership has no independent effect.

The results also suggest that the price of pollution is higher when plants are particularly visible and is far lower in poorer, less-educated communities. Thus, the intensity of pollution is far higher in such communities.

While it would be premature to generalize from these results, they suggest that the model of optimal pollution control in environmental economics is more relevant for developing countries than many have believed. Community-factory interactions seem to reflect environmental supply-demand considerations even when formal regulation does not exist.

In addition, the apparent power of informal regulation implies that cost-effective formal systems should be designed to complement, not supplant, community control. In particular: ° Local communities should not be forced to rely so heavily on visibility when judging environmental performance. Formal regulation should include publication of audited emissions reports from factories. ° Environmental injustice may be real and important. Many poor, uneducated communities may need extra support from national regulators. ° However, appropriate regulation should strike the right balance between equity and efficiency. Uniform national standards go too far because they eliminate all the natural and legitimate regional diversity that is also reflected in informal arrangements.

This paper - a product of the Environment, Infrastructure, and Agriculture Division, Policy Research Department - is part of a larger effort in the department to understand variations in pollution across firms. The authors may be contacted at or

Suggested Citation

Wheeler, David and Pargal, Sheoli, Informal Regulation of Industrial Pollution in Developing Countries: Evidence from Indonesia (February 1995). Available at SSRN:

David Wheeler (Contact Author)

World Bank - Policy Research Department ( email )

1818 H Street N.W.
Washington, DC 20433
United States


Sheoli Pargal

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
Washington, DC 20433
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics