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

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 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

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

Firms vs. consumers

First question is whether firms pay or consumers pay

If firms pay, next question is which inputs pay?LaborCapital

Case 1: Reg. affects few firms in larger competitive market

Demand

S0

S1

Cost to the individual firm:“Backward incidence”

Demand elasticFor these few firms

Reg shifts costs up

Case 2: Regulation covers entire industry

Demand

S0

S1 Regulation inc. costs:Supply shifts up,Price rises, quantity declines: forward andbackward incidence

$

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 SurplusShift down by wedge, get netchange in PS.

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?

$

Houses

D1

D0

S

p0

p1

Tax

House prices fall

If buyer pays tax…

Burden is on sellerThey see lower price, buyer gets

same CS$

Houses

D1

D0

S

p0

p1

If seller pays tax…

Burden is on sellerThey see lower price, buyer gets

same CS$

Houses

D0

S

p0

p1

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?

S0

S1

D

Houses

$

p0

p1

Current home-owners benefitfrom increasedhouse price

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

$

Housing

D0 (risky)D1 (safe)

S

p1

p0

Residents: Safety (+) Price (-)

Landowners: Price (+)

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

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:

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 facilitiesWhat do we find troubling about this?What should be done differently?

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 Factories typically attracted by low land prices Low environmental quality often depresses land prices

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

Why is incidence and justice in economics?

Framed as a positive question, totally appropriate for economicsDistributional consequences of an

action What to do about it is the reason we

have a political system – NOT an economics question