incidence of environmental regulations
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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).
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