Effects of Stricter Environmental Regulations on Resource Development

As technology and our ability to alter the natural world expand, it may lead to change in the level or type of externalities that economic activity places on society. This may prompt changes in the laws and regulations governing activity to limit the new externalities. While new regulations will change the distribution of rents around, welfare is impacted if the regulations alter the pace of economic activity. This analysis seeks to understand whether changes in oil and gas regulation brought about by the shale revolution have restricted the pace of drilling and production. This hypothesis is tested using data on North Dakota and Montana both before and after North Dakota increased the level of bonding required to operate in the state as well as stricter rules on waste disposal. Using regression discontinuity and difference-in-differences methods, results generally find that the new regulations had no statistical impact on the pace of drilling and production. While the average impact of the regulations on production was statistically indistinguishable from zero, it is found that smaller operators reduced their production and larger operators increased theirs. These results are instructive for policymakers who weigh the loss of economic welfare against improved environmental quality when deciding on new regulations.