The Costs of Environmental Regulation in a Concentrated Industry
The typical cost analysis of an environmental regulation consists of an engineering estimate of the compliance costs. In industries where fixed costs are an important determinant of market structure, this static analysis ignores the dynamic effects of the regulation on entry, investment, and market...
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| Format: | Article |
| Language: | en_US |
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John Wiley & Sons, Inc.
2012
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| Online Access: | http://hdl.handle.net/1721.1/73601 |
| _version_ | 1811091327144689664 |
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| author | Ryan, Stephen |
| author2 | Massachusetts Institute of Technology. Department of Economics |
| author_facet | Massachusetts Institute of Technology. Department of Economics Ryan, Stephen |
| author_sort | Ryan, Stephen |
| collection | MIT |
| description | The typical cost analysis of an environmental regulation consists of an engineering estimate of the compliance costs. In industries where fixed costs are an important determinant of market structure, this static analysis ignores the dynamic effects of the regulation on entry, investment, and market power. I evaluate the welfare costs of the 1990 Amendments to the Clean Air Act on the U.S. Portland cement industry, accounting for these effects through a dynamic model of oligopoly in the tradition of Ericson and Pakes (1995). Using the two-step estimator of Bajari, Benkard, and Levin (2007), I recover the entire cost structure of the industry, including the distributions of sunk entry costs and capacity adjustment costs. My primary finding is that the Amendments have significantly increased the sunk cost of entry, leading to a loss of between $810M and $3.2B in product market surplus. A static analysis misses the welfare penalty on consumers, and obtains the wrong sign of the welfare effects on incumbent firms. |
| first_indexed | 2024-09-23T15:00:42Z |
| format | Article |
| id | mit-1721.1/73601 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T15:00:42Z |
| publishDate | 2012 |
| publisher | John Wiley & Sons, Inc. |
| record_format | dspace |
| spelling | mit-1721.1/736012022-09-29T12:01:17Z The Costs of Environmental Regulation in a Concentrated Industry Ryan, Stephen Massachusetts Institute of Technology. Department of Economics Ryan, Stephen Ryan, Stephen The typical cost analysis of an environmental regulation consists of an engineering estimate of the compliance costs. In industries where fixed costs are an important determinant of market structure, this static analysis ignores the dynamic effects of the regulation on entry, investment, and market power. I evaluate the welfare costs of the 1990 Amendments to the Clean Air Act on the U.S. Portland cement industry, accounting for these effects through a dynamic model of oligopoly in the tradition of Ericson and Pakes (1995). Using the two-step estimator of Bajari, Benkard, and Levin (2007), I recover the entire cost structure of the industry, including the distributions of sunk entry costs and capacity adjustment costs. My primary finding is that the Amendments have significantly increased the sunk cost of entry, leading to a loss of between $810M and $3.2B in product market surplus. A static analysis misses the welfare penalty on consumers, and obtains the wrong sign of the welfare effects on incumbent firms. 2012-10-04T16:11:34Z 2012-10-04T16:11:34Z 2012-05 2011-07 Article http://purl.org/eprint/type/JournalArticle 1468-0262 0012-9682 http://hdl.handle.net/1721.1/73601 Ryan, Stephen P. “The Costs of Environmental Regulation in a Concentrated Industry.” Econometrica 80.3 (2012): 1019–1061. Web. en_US http://dx.doi.org/10.3982/ECTA6750 Econometrica Creative Commons Attribution-Noncommercial-Share Alike 3.0 http://creativecommons.org/licenses/by-nc-sa/3.0/ application/pdf John Wiley & Sons, Inc. MIT web domain |
| spellingShingle | Ryan, Stephen The Costs of Environmental Regulation in a Concentrated Industry |
| title | The Costs of Environmental Regulation in a Concentrated Industry |
| title_full | The Costs of Environmental Regulation in a Concentrated Industry |
| title_fullStr | The Costs of Environmental Regulation in a Concentrated Industry |
| title_full_unstemmed | The Costs of Environmental Regulation in a Concentrated Industry |
| title_short | The Costs of Environmental Regulation in a Concentrated Industry |
| title_sort | costs of environmental regulation in a concentrated industry |
| url | http://hdl.handle.net/1721.1/73601 |
| work_keys_str_mv | AT ryanstephen thecostsofenvironmentalregulationinaconcentratedindustry AT ryanstephen costsofenvironmentalregulationinaconcentratedindustry |