The Costs of Environmental Regulation in a Concentrated Industry
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Ryan_The Costs.pdf
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489.92 KB
Format
Adobe PDF
Checksum (MD5)
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Author(s)
Ryan, Stephen
Date Issued
May 2012
Journal
Econometrica
Publisher
John Wiley & Sons, Inc.
Citation
Ryan, Stephen P. “The Costs of Environmental Regulation in a Concentrated Industry.” Econometrica 80.3 (2012): 1019–1061. Web.
Version
Author's final manuscript
Abstract
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.
MIT Department
Massachusetts Institute of Technology. Department of Economics
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Creative Commons Attribution-Noncommercial-Share Alike 3.0
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DOI of Published Version
https://doi.org/10.3982/ECTA6750
