Accounting for Firm Exit and Loss of Variety in the Welfare Cost of Regulations

Dana Andersen

No 2016-9, Working Papers from University of Alberta, Department of Economics

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 firm exit and loss of variety. The model derives an analytical marginal abatement cost function, dividing the cost according to various direct and indirect effects, and explores the implications for optimal environmental policy. The model is calibrated to the U.S. manufacturing sector for criteria air pollutants, demonstrating that the direct cost of regulations significantly overstates the true cost. Moreover, because marginal abatement costs vary across industries, reallocating pollution across industries from their current levels can generate substantial 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)
Pages: 34 pages
Date: 2016-08-05
New Economics Papers: this item is included in nep-ene and nep-ind
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2016_009

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