Transcript Incidence of Environmental Regulations

Incidence of
Environmental
Regulations
Who pays for environmental
regulations, and how much?
Motivation

Group Project: One of the stipulations
of AB32 is that environmental justice
be taken into account in reducing
GHG emissions. What are the
environmental justice implications of a
cap and trade system and how can
the negative effects be reduced?
Some general rules

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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.
Example: New regulations on
metal fabrication industry

Industry costs go up

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Product price may go up


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Can industry raise prices, passing on costs?
Can industry lower wages to keep competitive?
Consumers will pay more
Some consumers will do without
Conclusion:


Consumers and capital owners pay
Citizens benefit from better environment
Key terms

Backward Incidence: inputs pay (wage earners,
capital owners, etc)
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Forward Incidence: consumers pay
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Example: Regulation only covering California firms
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
Firms vs. consumers
First question is whether firms pay or
consumers pay
 If firms pay, next question is which
inputs pay?

Labor
 Capital

Case 1: Reg. affects few firms
in larger competitive market
Reg shifts costs up
S1
S0
Demand
Demand elastic
For these few firms
Cost to the individual firm:
“Backward incidence”
Case 2: Regulation covers entire
industry
$
S1
S0
Regulation inc. costs:
Supply shifts up,
Price rises, quantity
declines: forward and
backward incidence
Demand
Electricity
Loss to consumers
$
S1
S0
A
p1
p0
Old CS: A+B
New CS: A
Change: B
B
Demand
Electricity
Loss to producers
$
S1
S0
p1
p0
Demand
Electricity
$
Old Producer Surplus
S1
S0
p1
p0
Demand
Electricity
New Producer Surplus
$
Shift down by
wedge, get net
change in PS.
S1
S0
p1
p0
Demand
Electricity
If producers pay, will owners
of capital or labor end up
paying?
Do employees have alternative job
opportunities? If yes, then producer can’t
pass on costs to labor.
 Is capital mobile (fungible) or application
specific? If mobile, then can’t pass on
costs to capital.
 If either capital or labor has few
alternatives, then that factor will probably
eat the cost.

Incidence isn’t always what it
appears

Suppose we tax house sales in Santa
Barbara – who pays?
$
S
Tax
p0
House prices fall p1
D0
D1
Houses
If buyer pays tax…

Burden is on seller

$
p0
p1
They see lower price, buyer gets
same CS
S
D0
D1
Houses
If seller pays tax…

Burden is on seller

$
p0
p1
They see lower price, buyer gets
same CS
S
D0
Houses
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?

If supply not fixed: tax
development

Who benefits from a development tax?
$
S1
S0
Current homeowners benefit
from increased
house price
p1
p0
D
Houses
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, paid for with an IV sales tax.
 Who would benefit from this action?
 Who would bear most of the costs?

A simple economic model
The real question:
Are residents (students) better off?
$
S
p1
p0
Residents: Safety (+)
Price (-)
Landowners: Price (+)
D1 (safe)
D0 (risky)
Housing
Conclusion: Landlords basic beneficiaries
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:
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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)
South Coast Santa Barbara,
Hispanic Population
Dots are toxic facilities
What do we find troubling about this?
What should be done differently?
Issues with environmental
racism

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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
 Factories typically attracted by low land prices
 Low environmental quality often depresses land prices
What to do with incidence
(in evaluating a policy/project)

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Separately measure incidence and
efficiency – two measures of the
performance of a policy
Adjust cost-benefit analysis using income
weights
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Track costs and benefits to different income
groups
Weigh lower income groups higher than
higher income groups
Size of weights difficult to determine
Why is incidence and justice
in economics?
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Framed as a positive question, totally
appropriate for economics

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Distributional consequences of an
action
What to do about it is the reason we
have a political system – NOT an
economics question