Incidence of Environmental Regulations

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).