Download 11.Incidence

Incidence of Environmental
Regulations
Who pays for environmental
regulations, and how much?
Motivation
Group Project: Arnold has proposed
putting a $1 per gallon gasoline tax in
California to pay for habitat
conservation and other environmental
amenities. Who ultimately pays this
tax? Oil companies? The poor?
Residents of the inner city? Visitors?
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
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
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
They see lower price, buyer gets same CS
$
p0
p1
S
D0
D1
Houses
If seller pays tax…
Burden is on seller
They see lower price, buyer gets same CS
$
p0
p1
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.
Who would benefit from this action?
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:
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
What 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 folks
Low environmental quality often depresses land prices
Conclusion
Examining 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).