The costs of environmental regulation in a concentrated industry
Name
2005-010.pdf
Size
383.61 KB
Format
Adobe PDF
Checksum (MD5)
73b62d64ae9259e8b8729728e43860d3
Author(s)
Ryan, Stephen
Date Issued
2005
Publisher
MIT Center for Energy and Environmental Policy Research
Series/Report no.
MIT-CEEPR (Series) ; 05-010WP.
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 US Portland cement industry, accounting for these effects through a dynamic model of oligopoly in the tradition of Ericson and Pakes (1995). Using a recently developed two-step estimator, I recover the entire cost structure of the industry, including the distribution of sunk entry costs and adjustment costs of investment. I find that the Amendments have significantly increased the sunk cost of entry. I solve for the Markov perfect Nash equilibrium (MPNE) of the model and simulate the welfare effects of the Amendments. A static analysis misses the welfare penalty on consumers, and obtains the wrong sign on the welfare effects on incumbent firms.
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