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

Author

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  • Andersen, Dana C.

    (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.

Suggested Citation

  • Andersen, Dana C., 2016. "Accounting for Firm Exit and Loss of Variety in the Welfare Cost of Regulations," Working Papers 2016-9, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:2016_009
    as

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    File URL: https://sites.ualberta.ca/~econwps/2016/wp2016-09.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    general equilibrium; firm heterogeneity; welfare cost of regulations; manufacturing sector;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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