Dynamic pollution regulation

This paper examines pollution regulation in a dynamic setting with complete information. We show that tradeable pollution permits may not achieve the social optimum even when the permit market is perfectly competitive. The reason is that the optimal tradeable permits regulation will typically be time inconsistent. We then show that pollution taxes can achieve the first best and are time consistent.We thank Claudio Mezzetti, Wally Oates, and Paul Rhode for helpful comments. The last two authors thank the National Science Foundation for financial support.     

Effectiveness of air pollution standards in reducing mortality in India

India experiences some of the highest air pollution levels globally, with 13 of the 20 most polluted cities in the world. In this paper, we estimate the relationship between air pollution policies in India and mortality for people of all ages and all causes. We estimate the relationship between mortality and two major air pollution regulations, the Supreme Court Action Plan (SCAP) and the Catalytic Converter (CC) policy. Although data for mortality in India have improved over time, the annual average mortality for many districts is volatile, with many outliers and missing values. After addressing these measurement issues in a difference-in-differences setup, we do not find evidence that the policies were effective in significantly reducing mortality. In an effort to understand the potential benefits of reducing pollution levels in India, we investigate the association of different pollution types with mortality. This analysis relies upon relatively recent satellite data on PM_2.5 levels in India. We examine this relationship for India for the first time, using a fixed effects model in an attempt to address issues of endogeneity and measurement error. We find that PM_2.5 levels are positively associated with mortality, with a 10% increase in pollution conditionally associated with a 2.0% increase in the mortality rate.     

Firm behaviour under pollution ratio standards with non-compliance

This paper compares a firm’s short run optimal production and abatement rules under emission level standards and standards expressed in terms of emissions per unit of output (ratio standards). The models allow for non-compliance with standards, with expected penalties dependant on either level or relative violations of the standard in question. It is shown that ratio arguments make a difference to the optimal decision rules derived for a profit-maximising firm. For example, for a given level of emissions the firm both produces more, and abates more, under a ratio standard, so that ratio and level standards cannot be used interchangeably to achieve the same combination of emissions and output. The implications for the efficiency of pollution control are briefly discussed.

Product standards, innovation and regulation

This paper examines the public policy, issues associated with product standardization. It addresses three main questions: (1) Do laissez faire markets provide an appropriate level ofcompatibility and standardization? (2) Does standardization result in anti-competitive behaviour? (3) Does standardization promote or retard innovation? The theoretical debate surrounding each of these issues is briefly reviewed. The process of setting standards with respects to high definition telivision technology is examined and used to illustrate the problems facing regulators. The paper concludes that, in the case of high definition television, the US market-based approach to standard setting has been more successful than has the more directly interventionist approaches adopted in Europe and Japan.     

Alternative standards and instruments for air pollution control in Poland

Like other Central European countries, Poland faces the twin challenges of improving environmental quality while also fostering sustainable economic development. In this study we examine the costs of different standards for air pollution control, and the cost savings from using incentive-based policy instruments in lieu of more rigid command-and-control policies. The comparisons are based on the results of a simulation model of energy use and air pollution control for the Polish economy over 1990–2015. The model simulates least-cost energy supply decisions under different environmental policy assumptions, the corresponding emissions, and the cost of achieving the specified policy objectives. The model results suggest that incentive-based policies will have efficiency gains over command policies that are at least worthy of consideration and may be quite substantial. The size of the gains in practice depends in part on how much flexibility is built into the command approach, e.g., capacity for intrafirm trading as well as alack of technology-specific requirements. To achieve these gains, an increase in the current levels of emissions fees is desirable both to strengthen abatement incentives and to improve the capacity of the Polish government to overcome past environmental damages. However, it seems highly unlikely in practice that fees could be raised to the levels necessary to meet current Polish emissions standards. To make further headway, an evolutionary approach to emissions trading patterned after (and profiting from the experience with) emissions trading in the U.S. seems useful. The program could start out relatively modestly and increase in ambitiousness as the Polish economic transition proceeds.     

State enforcement of federal standards: Implications for interstate pollution

This paper explores the relationship between interstate air pollution and the division of power between federal and state agencies in setting and enforcing standards. In the context of the US Clean Air Act we argue that the EPA is able to monitor the adoption of technology-based standards more closely than it can monitor state-level enforcement, and that this causes an effective division of control between federal and state agencies. Our analysis offers three main insights into the interstate pollution problem in this setting. First, states have an incentive to enforce standards less stringently on firms located close to downwind borders, and this leads to excessive interstate pollution in equilibrium. Second, there can arise an inherent substitutability in the regulatory problem between strict standards and compliance effort, and this creates a strategic linkage between the federal policy on standards and state policies on enforcement. In particular, a tighter federal standard can induce less selective enforcement but can also lead to less enforcement overall. Third, states will attempt to neutralize the impact of location-based federal standards (that specifically target interstate pollution) in a way that actually exacerbates the underlying enforcement problem.     

Price-cap versus rate-of-return regulation

Rate-of-return regulation has been criticized for providing inappropriate incentives to regulated firms and for being costly to administer. An alternative is price-cap regulation, by which ceilings (caps), based on indices of price and technological change are imposed, below which the regulated firm has full pricing freedom. The differences and similarities of the two are reviewed herein in the light of recent literature. In practice, price-cap is not distinct from rate-of-return regulation. Especially for the multiproduct firm, information requirements—the ultimate source of problems with rate-of-return regulation—are comparables. Price-cap regulation fails to address the real regulatory issue of whether an industry is, in whole or in part, a natural monopoly.     

Negotiation versus consultation in the development of a regulation

Under negotiated regulation, stakeholders are invited to reach an agreement on a regulatory innovation. This approach might be harmful, because potential improvements might be blocked. However, negotiation can also be beneficial—eliciting information about how to improve regulations. Three reasons are identified. First, a participant might hesitate to provide information, unless she can prevent that information being used against her interests. Second, negotiation provides stronger incentives than consultation does, to suggest innovations that primarily benefit parties other than oneself. Third, if uninformed stakeholders can reduce the no-information payoff of informed parties, those parties lose the incentive to strategically withhold information.      

International convergence in regulation: The case of measurable standards

Recent literature on competition in regulation concludes that the iterative adjustment that may start with mutual recognition is an open-ended process. This paper shows that, even without acceptance of reciprocal minimum standards, a process of iterative adjustment may be triggered by the coexistence of foreign goods with high standard levels and domestic goods with relatively low standard levels. Focusing on the case of international heterogeneity of levels of a specific standard, the paper offers an intuitive counter-argument to the fear that free trade necessarily implies a “race to the bottom“ of standard levels.     

Automobile quality choice under pollution control regulation

In this paper, we develop a modified quality choice model to study the effects of various mobile-source air pollution control regulations. We have a single producer that supplies a fixed number of car types (two) but faces a spectrum of consumers differing in their valuation of car quality. The car manufacturer chooses the quality levels of the two car types as well as the sales mix between the two types and the size of the market it wishes to supply. By endogenizing both the sales mix and the market size, while still allowing quality to be a choice variable, we are able to more completely analyze the impact of any car pollution control regulation. Existing studies of this impact either focus on the model line adjustment response (shifts in the quality array) or on the price adjustment response (changes in the sales mix and market size). In allowing for both the model line and the price adjustment options, we find that the corporate average fuel efficiency (CAFE) standard is unambiguously welfare superior to the low-emission vehicle quantity constraint (LEV) and zero-emission vehicle (ZEV) programs. We also show that the effects of the CAFE standard are not equivalent to those of a fuel tax, as previously found, and that, for a given car pollution target, the former is preferred to the latter.      

Ill-behaviour of transformation-frontiers with environmental quality versus pollution

If one looks at environmental quality N as a renewable natural resource (with its own natural dynamics) which is changed by emissions Z, then one gets a better understanding of the shape of the damage function. In the case of a logistic growth dynamics one obtains a well-shaped transformation frontier N(Z), even in a two-species natural dynamics. For a more general natural interaction in the framework of a prey-predator model one obtains the possibilities of a cusp catastrophe which makes the transformation frontier N(Z) ill-shaped for the standard arguments of economists and their most favoured environmental policy instruments.     

Transboundary pollution,tax competition and the efficiency of uncoordinated environmental regulation

Under capital tax competition, surprisingly, Ogawa and Wildasin (2009) find that uncoordinated policymaking leads to a first‐best outcome even in the presence of transboundary pollution. However, I show that if the level of environmental regulation is endogenized, the regulation level becomes too loose compared with the optimum (“race to the bottom”). Thus, despite the efficiency result of Ogawa and Wildasin (2009), efforts to achieve international environmental policy coordination are needed. I then examine the dependence of this result on the level of decisive voter's capital endowment. The regulation is inefficiently loose in many cases, but it can be too strict if the decisive voter's capital endowment is above the average. Thus, the possibility of “race to the top” cannot be eliminated. The inefficiency result does not generally depend on the timing of policymaking, although the efficiency may be restored in the limit case where the decisive voter has no capital at all.     

Subsidy design: wealth versus benefits

A government would like to subsidize an indivisible good. Consumers’ valuations of the good vary according to their wealth and benefits from the good. A subsidy scheme may be based on consumers’ wealth or benefit information. We translate a wealth-based policy to a benefit-based policy, and vice versa, and give a necessary and sufficient condition for the pair of policies to implement the same assignment: consumers choose to purchase the good under the wealth-based policy if and only if they choose to do so under the translated benefit-based policy. General taxation allows equivalent policies to require the same budget.     

Trade agreements,domestic environmental regulation,and transboundary pollution

This paper investigates a second-best trade agreement between two countries that takes the distortion arising from their non-coordinated environmental policies into consideration. In a reciprocal-markets model with bidirectional transboundary pollution, we find that if the transboundary pollution is sufficiently strong, the second-best trade agreement requires that both countries subsidize the imported goods whose consumption gives rise to pollution. We also find that a bilateral tariff reduction is beneficial to the global environment.     

Minimum standards, insurance regulation and adverse selection: evidence from the Medigap market

This paper examines the implications of minimum standards for insurance markets. I study the imposition of binding minimum standards on the market for voluntary private health insurance for the elderly. The central estimates suggest that the introduction of the standards was associated with an 8 percentage point (25%) decrease in the proportion of the population with coverage in the affected market, with no evidence of substitution toward other, unregulated sources of insurance coverage. To explore possible factors contributing to the impact of the minimum standards, I develop comparative static predictions of the impact of imposing minimum standards in an insurance market with adverse selection. The observed changes in market equilibrium associated with the minimum standards are broadly consistent with these predictions, providing evidence of the existence of adverse selection in this insurance market. More importantly, they suggest that the presence of adverse selection—which in principle may provide an economic rationale for minimum standards—in practice may have exacerbated the declines in insurance coverage associated with the minimum standards.     

The design of optimal climate policy with air pollution co-benefits

This paper develops a model of an optimal regulatory program for greenhouse gases (GHGs) emissions that accommodates the benefits due to reductions of co-pollutants including: sulfur dioxide (SO₂), nitrogen oxides (NO_x), volatile organic compounds (VOC), and fine particulate matter (PM_2.5). Employing per ton damage estimates for the co-pollutants produced by an integrated assessment model, co-pollutant damage estimates per ton carbon dioxide equivalent (CO₂e) are developed for over 10,000 sources of GHGs in the lower 48 states including both transportation sources and electric power generation. For coal-fired electric power generation, the co-pollutant damages are larger in magnitude than recent peer-reviewed estimates of the marginal damage for GHGs. The co-pollutant damage per ton CO₂e varies considerably across source types and source location. The paper estimates the welfare gain from adopting a policy that encompasses the spatially variant co-pollutant damage to be between $1 million and $85 million annually. The range depends on the slope of the marginal abatement cost curve. The paper also shows that a distortionary aggregate emission cap reduces the advantage of differentiated policy. Provided an excessively strict cap, the spatially differentiated policy may reduce aggregate welfare. This result has important implications for GHG policy in the United States; although co-pollutant benefits of abating GHGs have been shown to be significant in magnitude, tailoring climate policy to reflect these source-specific co-benefits is not necessarily socially beneficial. This bolsters arguments for upstream policy designs.     

Professional versus consumer interests in regulation: the case of the US child care industry

Professional licensure benefits producers by creating entry barriers into the profession, but consumers might also gain if licensure induces producers to supply high levels of quality. Whether consumers or producers gain most form licensure can be determined by examining the effect of licensure requirements on aggregate consumption. This paper uses a cross-sectional model to estimate the relationship between variations in state licensure rules and consumption of child care services. The results suggest that professional interests, and not those of consumers, are dominant in the setting of regulatory standards for the US child care industry.     

Effective regulation versus tacit collusion in the long-distance market: an empirical analysis

Regulatory decisions often must be made in an atmosphere of uncertainty, and arguments presented by the affected parties frequently add to, rather than resolve, that uncertainty. Here, we examine several of the deregulatory decisions affecting the long-distance market that were rendered by the FCC over the two-decade period following the divestiture of AT&T. Our purpose is to provide empirical evidence relevant to some of the arguments regarding market conditions that were presented during that period. Findings suggest that some of the more prominent allegations are not supported by the data.      

Self-regulation versus government regulation: an externality view

Journal of Regulatory Economics - Who should be responsible for industry regulation, a private self-regulatory agency or a public agency? This paper provides a simple framework to analyze the...     

Command-and-control regulation,incentive for pollution abatement,and market structure

Journal of Regulatory Economics - This paper analyzes the effect of command-and-control regulation on firms’ incentives for pollution abatement, market structure, and social welfare. We...