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Incidence of Environmental Regulations

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.

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Incidence of Environmental Regulations

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

  2. 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).

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

  4. Regulatory incidence to single firm in competitive market S1 S0 Demand Cost to the individual firm: “Backward incidence”

  5. Regulatory incidence to the industry in a competitive market $ S1 Regulation  costs: Supply shifts up, Price rises, quantity declines S0 Demand Electricity

  6. Loss to consumers $ Old CS: A+B New CS: A Change: B S1 S0 A p1 B p0 Demand Electricity

  7. Loss to producers $ S1 S0 p1 p0 Demand Electricity

  8. $ Old Producer Surplus S1 S0 p1 p0 Demand Electricity

  9. New Producer Surplus Shift down by wedge, get net change in PS. $ S1 S0 p1 p0 Demand Electricity

  10. SB housing market: fixed supply • Who pays for a tax on house sales in Santa Barbara county? $ S p0 p1 D0 D1 Houses

  11. If buyer pays tax… • Burden is on seller • They see lower price, buyer gets same CS $ S p0 p1 D0 D1 Houses

  12. If seller pays tax… • Burden is on seller • They see lower price, buyer gets same CS $ S p0 p1 D0 Houses

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

  14. If supply not fixed: tax development • Who benefits from a development tax? S1 $ S0 Current home- owners benefit from increased house price p1 p0 D Houses

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

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

  17. 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

  18. 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”

  19. 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?

  20. A simple economic model The real question: Are residents (students) better off? $ Residents: Safety (+) Price (-) Landowners: Price (+) S p1 p0 D1 (safe) D0 (risky) Housing

  21. 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).

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