Incidence of Environmental Regulations Who pays for environmental regulations, and how much?

Some general rules “Corporations” never pay. Remember, corporations are just paper. People are shareholders and own the corporations. Impose a regulation, shareholders may lose, consumers may gain and lose. Effects ripple through economy. Consumers may benefit from improved environment and pay higher price for goods (e.g. pesticide regulation).

Key terms Backward Incidence: inputs pay (wage earners, capital, etc) Forward Incidence: consumers pay Incidence by class: income, ethnicity, geographic region, age, education, etc.

Regulatory incidence to single firm in competitive market Demand S0S0 S1S1 Cost to the individual firm: “Backward incidence”

Regulatory incidence to the industry in a competitive market Demand S0S0 S1S1 Regulation  costs: Supply shifts up, Price rises, quantity declines $ Electricity

Loss to consumers Demand S0S0 S1S1 Electricity $ p0p0 p1p1 A B Old CS: A+B New CS: A Change: B

Loss to producers Demand S0S0 S1S1 Electricity $ p0p0 p1p1

Demand S0S0 S1S1 Electricity $ p0p0 p1p1 Old Producer Surplus

Demand S0S0 S1S1 Electricity $ p0p0 p1p1 New Producer Surplus Shift down by wedge, get net change in PS.

SB housing market: fixed supply Who pays for a tax on house sales in Santa Barbara county? $ Houses D1D1 D0D0 S p0p0 p1p1

If buyer pays tax… Burden is on seller They see lower price, buyer gets same CS $ Houses D1D1 D0D0 S p0p0 p1p1

If seller pays tax… Burden is on seller They see lower price, buyer gets same CS $ Houses D0D0 S p0p0 p1p1

SB News Press Headline “Goleta Developer Fees May Double” February 11, 2003 Who pays for or benefits from an increase in development fees?

If supply not fixed: tax development Who benefits from a development tax? S0S0 S1S1 D Houses $ p0p0 p1p1 Current home- owners benefit from increased house price

Recall basic approaches to regulation 1.Command & Control: regulate exactly what can and cannot be done 2.Price Incentives: provide financial incentive to do the “right” thing 3.Marketable Permits: fix pollution at a given level, let firms trade their rights to pollute.

Controlling growth: C&C Zoning, building moratoria, infrastructure fees, growth boundaries, water limits, costly (lengthy) permit process, difficult building requirements.

Controlling growth: price incentives Property taxes If use revenue to buy parks and schools, houses become more desirable Tax on building permits Dollar amount or a percentage Land conversion fee

Controlling growth: marketable permits Issue fixed number of building permits per year. May auction them off, give them away, distribute according to previous development. Then allow buying and selling of permits. E.g. “transferable development rights”

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 $ Housing D 0 (risky) D 1 (safe) S p1p1 p0p0 Residents: Safety (+) Price (-) Landowners: Price (+) The real question: Are residents (students) better off?

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).