Incidence of Environmental RegulationsMotivationSome general rulesExample: New regulations on metal fabrication industryKey termsFirms vs. consumersCase 1: Reg. affects few firms in larger competitive marketCase 2: Regulation covers entire industryLoss to consumersLoss to producersSlide 11Slide 12If producers pay, will owners of capital or labor end up paying?Incidence isn’t always what it appearsIf buyer pays tax…If seller pays tax…SB News Press HeadlineIf supply not fixed: tax developmentExample 1: The Isla Vista cliffsA simple economic modelEnvironmental Racism/Justice: A Special Kind of IncidenceSlide 22Slide 23Issues with environmental racismWhat to do with incidence (in evaluating a policy/project)ConclusionIncidence of Environmental RegulationsWho pays for environmental regulations, and how much?MotivationGroup Project: Arnold has proposed putting a $1 per gallon gasoline tax in California to pay for habitat conservation and other environmental amenities. Who ultimately pays this tax? Oil companies? The poor? Residents of the inner city? Visitors?Some general rulesOnly people gain and lose – not organizations.“Corporations” never pay. Corporations are just paper. Corporation is owned by its shareholders – people.Consumers may benefit from improved environment and pay higher price for goods (e.g. pesticide regulation).Impose a regulation, typically who pays:ConsumersOwners of inputs to production:•Workers – owners of labor•Shareholders – owners of capitalEffects ripple through economy.Example: New regulations on metal fabrication industryIndustry costs go upCan industry raise prices, passing on costs?Can industry lower wages to keep competitive?Product price may go upConsumers will pay moreSome consumers will do withoutConclusion:Consumers and capital owners payCitizens benefit from better environmentKey termsBackward Incidence: inputs pay (wage earners, capital owners, etc)Example: Regulation only covering California firmsForward Incidence: consumers payExample: Regulation covers all US firms and no foreign competitionIncidence by class: income, ethnicity, geographic region, age, education, etc.Example: gasoline tax would fall heavily on the poorFirms vs. consumersFirst question is whether firms pay or consumers payIf firms pay, next question is which inputs pay?LaborCapitalCase 1: Reg. affects few firms in larger competitive marketDemandS0S1Cost to the individual firm:“Backward incidence”Demand elasticFor these few firmsReg shifts costs upCase 2: Regulation covers entire industryDemandS0S1Regulation inc. costs:Supply shifts up,Price rises, quantity declines: forward andbackward incidence$ElectricityLoss to consumersDemandS0S1Electricity$p0p1ABOld CS: A+BNew CS: AChange: BLoss to producersDemandS0S1Electricity$p0p1DemandS0S1Electricity$p0p1Old Producer SurplusDemandS0S1Electricity$p0p1New Producer SurplusShift down by wedge, get netchange in PS.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?$HousesD1D0Sp0p1TaxHouse prices fallIf buyer pays tax…Burden is on sellerThey see lower price, buyer gets same CS$HousesD1D0Sp0p1If seller pays tax…Burden is on sellerThey see lower price, buyer gets same CS$HousesD0Sp0p1SB News Press Headline“Goleta Developer Fees May Double” (Feb 11, 2003)Who pays for an increase in development fees?Who benefits from an increase in development fees?If supply not fixed: tax developmentWho benefits from a development tax?S0S1DHouses$p0p1Current home-owners benefitfrom increasedhouse priceExample 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$HousingD0 (risky)D1 (safe)Sp1p0Residents: Safety (+) Price (-)Landowners: Price (+) The real question:Are residents (students) better off?Conclusion: Landlords basic beneficiariesEnvironmental 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 PopulationWhat 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 pricesWhat 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