Incidence of Environmental Regulations

Who pays for environmental regulations, and how much?

Some general rules“Corporations” never pay. Remember, corporations are just paper. People are shareholders and own the corporations.Impose a regulation, shareholders may lose, consumers may gain and lose.Effects ripple through economy.Consumers may benefit from improved environment and pay higher price for goods (e.g. pesticide regulation).

Key termsBackward Incidence: inputs pay (wage earners, capital, etc)Forward Incidence: consumers payIncidence by class: income, ethnicity, geographic region, age, education, etc.

Regulatory incidence to single firm in competitive market

Demand

S0

S1

Cost to the individual firm:“Backward incidence”

Regulatory incidence to the industry in a competitive market

Demand

S0

S1 Regulation costs:Supply shifts up,Price rises, quantity declines

$

Electricity

Loss to consumers

Demand

S0

S1

Electricity

$

p0

p1

A

B

Old CS: A+BNew CS: AChange: B

Loss to producers

Demand

S0

S1

Electricity

$

p0

p1

Demand

S0

S1

Electricity

$

p0

p1

Old Producer Surplus

Demand

S0

S1

Electricity

$

p0

p1

New Producer Surplus Shift down by wedge, get netchange in PS.

SB housing market: fixed supplyWho pays for a tax on house sales in Santa Barbara county?

$

Houses

D1

D0

S

p0

p1

If buyer pays tax…Burden is on seller

They see lower price, buyer gets same CS$

Houses

D1

D0

S

p0

p1

If seller pays tax…Burden is on seller

They see lower price, buyer gets same CS$

Houses

D0

S

p0

p1

SB News Press Headline“Goleta Developer Fees May Double”February 11, 2003

Who pays for or benefits from an increase in development fees?

If supply not fixed: tax development

Who benefits from a development tax?

S0

S1

D

Houses

$

p0

p1

Current home-owners benefitfrom increasedhouse price

Recall basic approaches to regulation

1. Command & Control: regulate exactly what can and cannot be done

2. Price Incentives: provide financial incentive to do the “right” thing

3. Marketable Permits: fix pollution at a given level, let firms trade their rights to pollute.

Controlling growth: C&CZoning, building moratoria, infrastructure fees, growth boundaries, water limits, costly (lengthy) permit process, difficult building requirements.

Controlling growth: price incentivesProperty taxes

If use revenue to buy parks and schools, houses become more desirable

Tax on building permits Dollar amount or a percentage

Land conversion fee

Controlling growth: marketable permits

Issue fixed number of building permits per year.

May auction them off, give them away, distribute according to previous development.

Then allow buying and selling of permits.E.g. “transferable development rights”

The Isla Vista cliffsIsla 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?

A simple economic model

$

Housing

D0 (risky)D1 (safe)

S

p1

p0

Residents: Safety (+) Price (-)

Landowners: Price (+)

The real question:Are residents (students) better off?

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