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 Owners of inputs to production 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 Firms vs consumers First question is whether firms pay or consumers pay If firms pay next question is which inputs pay Labor Capital 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 p0 p1 see lower price buyer gets same CS S D0 D1 Houses If seller pays tax Burden is on seller They p0 p1 see lower price buyer gets same CS 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 residents Low environmental quality often depresses land prices What to do with incidence in evaluating a policy project Separately measure incidence and efficiency two measures of the performance of a policy Adjust cost benefit analysis using income weights Track costs and benefits to different income groups Weigh lower income groups higher than higher income groups Size of weights difficult to determine 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