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Accounting for loss of variety and factor reallocations in the welfare cost of regulations

Dana Andersen

Journal of Environmental Economics and Management, 2018, vol. 88, issue C, 69-94

Abstract: This paper develops a multi-sector general equilibrium model with heterogeneous firms to account for both the direct cost of regulations on regulated firms as well as the indirect cost associated with loss of variety and factor reallocations. The model derives an analytical marginal abatement cost function, dividing the cost according to these direct and indirect effects, and explores the implications for optimal environmental policy. The model is numerically simulated using parameters for the U.S. manufacturing sector for criteria air pollutants, demonstrating that the direct cost of regulations understates the true cost. Moreover, because marginal abatement costs vary across industries, reallocating pollution across industries to achieve cost-effectiveness can generate modest cost savings.

Keywords: General equilibrium; Firm heterogeneity; Welfare cost of regulations; Manufacturing sector (search for similar items in EconPapers)
JEL-codes: D51 D62 L11 L60 Q52 Q53 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:88:y:2018:i:c:p:69-94

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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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