Incidence of Environmental Regulations

1
Incidence of Environmental Regulations

• Who pays for environmental regulations, and how
  much?

2
Motivation

• Group Project Arnold has proposed putting a 1
  per gallon gasoline tax in California to pay for
  habitat conservation and other environmental
  amenities. Who ultimately pays this tax? Oil
  companies? The poor? Residents of the inner
  city? Visitors?

3
Some general rules

• Only people gain and lose not organizations.
• Corporations never pay. Corporations are just
  paper. Corporation is owned by its shareholders
  people.
• Consumers may benefit from improved environment
  and pay higher price for goods (e.g. pesticide
  regulation).
• Impose a regulation, typically who pays
• Consumers
• Owners of inputs to production
• Workers owners of labor
• Shareholders owners of capital
• Effects ripple through economy.

4
Example New regulations on metal fabrication
industry

• Industry costs go up
• Can industry raise prices, passing on costs?
• Can industry lower wages to keep competitive?
• Product price may go up
• Consumers will pay more
• Some consumers will do without
• Conclusion
• Consumers and capital owners pay
• Citizens benefit from better environment

5
Key terms

• Backward Incidence inputs pay (wage earners,
  capital owners, etc)
• Example Regulation only covering California
  firms
• Forward Incidence consumers pay
• Example Regulation covers all US firms and no
  foreign competition
• Incidence by class income, ethnicity, geographic
  region, age, education, etc.
• Example gasoline tax would fall heavily on the
  poor

6
Firms vs. consumers

• First question is whether firms pay or consumers
  pay
• If firms pay, next question is which inputs pay?
• Labor
• Capital

7
Case 1 Reg. affects few firms in larger
competitive market
Reg shifts costs up
S1
S0
Demand elastic For these few firms
Demand
Cost to the individual firm Backward incidence
8
Case 2 Regulation covers entire industry

S1
Regulation inc. costs Supply shifts up, Price
rises, quantity declines forward and backward
incidence
S0
Demand
Electricity
9
Loss to consumers

Old CS AB New CS A Change B
S1
S0
A
p1
B
p0
Demand
Electricity
10
Loss to producers

S1
S0
p1
p0
Demand
Electricity
11

Old Producer Surplus
S1
S0
p1
p0
Demand
Electricity
12
New Producer Surplus
Shift down by wedge, get net change in PS.

S1
S0
p1
p0
Demand
Electricity
13
If producers pay, will owners of capital or labor
end up paying?

• Do employees have alternative job opportunities?
  If yes, then producer cant pass on costs to
  labor.
• Is capital mobile (fungible) or application
  specific? If mobile, then cant pass on costs to
  capital.
• If either capital or labor has few alternatives,
  then that factor will probably eat the cost.

14
Incidence isnt always what it appears

• Suppose we tax house sales in Santa Barbara who
  pays?

S
Tax
p0
House prices fall
p1
D0
D1
Houses
15
If buyer pays tax

• Burden is on seller
• They see lower price, buyer gets same CS

S
p0
p1
D0
D1
Houses
16
If seller pays tax

• Burden is on seller
• They see lower price, buyer gets same CS

S
p0
p1
D0
Houses
17
SB News Press Headline

• Goleta Developer Fees May Double (Feb 11, 2003)
• Who pays for an increase in development fees?
• Who benefits from an increase in development fees?

18
If supply not fixed tax development

• Who benefits from a development tax?

S1

S0
Current home- owners benefit from increased house
price
p1
p0
D
Houses
19
Example 1 The Isla Vista cliffs

• Isla Vista, CA many houses on eroding sea
  cliffs safety concern, eyesore, house stability
  concern
• College community, mostly student rentals.
• Consider a publicly-funded project to shore up
  the cliffs.
• Who would benefit from this action?

20
A simple economic model
The real question Are residents (students)
better off?

Residents Safety () Price
(-) Landowners Price ()
S
p1
p0
D1 (safe)
D0 (risky)
Housing
Conclusion Landlords basic beneficiaries
21
Environmental Racism/Justice A Special Kind of
Incidence

• Environmental Justice (EJ) is the fair treatment
  and meaningful involvement of all people
  regardless of race, color, natural origin, or
  income with respect to the development,
  implementation, and enforcement of environmental
  laws, regulations and policies. (EPA) EPA
  examples
• Low-income citizens, and quite often minorities,
  are more likely to live near landfills,
  incinerators, and hazardous waste treatment
  facilities.
• Low-income and African American children
  consistently have higher than normal levels of 
  lead in their blood and asthma conditions.
• 80 percent Hispanic, 65 percent African American,
  and 57 percent White people live in areas which
  fail to meet some U.S. EPA air quality standards.
  
• Should income be included in this definition?
• If incinerator is choosing between locating in
  Bel Air or South Central LA, which should it
  choose and why?
• Applies to acts of government (eg, regulations)
  and acts of firms (polluters)

22
South Coast Santa Barbara, Hispanic Population
23
What do we find troubling about this? What should
be done differently?
24
Issues with environmental racism

• Targeting regulations or plant siting based on
  race or ethnicity clearly wrong.
• Alesina et al (1999) shares of spending on
  public goods in U.S. cities are inversely related
  to the city's ethnic fragmentation
• Cutler and Glaeser (1997) African Americans in
  more segregated areas have significantly worse
  outcomes than African Americans in less
  segregated areas.
• Targeting regulations or plant siting based on
  income is more complex
• Low land prices often attract low income
  residents
• Low environmental quality often depresses land
  prices

25
What to do with incidence (in evaluating a
policy/project)

• Separately measure incidence and efficiency two
  measures of the performance of a policy
• Adjust cost-benefit analysis using income weights
• Track costs and benefits to different income
  groups
• Weigh lower income groups higher than higher
  income groups
• Size of weights difficult to determine

26
Conclusion

• Examining incidence can provide a different
  picture of consequences of environmental
  regulations.
• Often not what youd think.
• Only requires simple analysis.
• Often regulations can benefit those already in
  the game (e.g. IV landlords).