Econometrica: May 2012, Volume 80, Issue 3

The Costs of Environmental Regulation in a Concentrated Industry

https://doi.org/10.3982/ECTA6750
p. 1019-1061

Stephen P. Ryan

The typical cost analysis of an environmental regulation consists of an engineering estimate of the compliance costs. In industries where fixed costs are an important determinant of market structure, this static analysis ignores the dynamic effects of the regulation on entry, investment, and market power. I evaluate the welfare costs of the 1990 Amendments to the Clean Air Act on the U.S. Portland cement industry, accounting for these effects through a dynamic model of oligopoly in the tradition of Ericson and Pakes (1995). Using the two‐step estimator of Bajari, Benkard, and Levin (2007), I recover the entire cost structure of the industry, including the distributions of sunk entry costs and capacity adjustment costs. My primary finding is that the Amendments have significantly increased the sunk cost of entry, leading to a loss of between $810M and $3.2B in product market surplus. A static analysis misses the welfare penalty on consumers, and obtains the wrong sign of the welfare effects on incumbent firms.

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Supplemental Material

Supplement to "The Costs of Environmental Regulation in a Concentrated Industry"

This appendex discusses identification of the model in the paper.  New results concerning the identification of parameters in a two-step Bajari, Benkard, and Levin (2007) setup are given.  Under linearity of the unknown parameters, it is shown that identification obtains when an easily-verified rank and order condition on a matrix derived from estimated functions holds.

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Supplement to "The Costs of Environmental Regulation in a Concentrated Industry"

This zip file contains the replication files for the manuscript.

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