| Publications [#26416] of Stephen P. Ryan
Working Papers
- Stephen P. Ryan, The Costs of Environmental Regulation in a Concentrated Industry,
Job Market Paper
(September, 2004) [pdf]
(last updated on 2004/09/29)
Abstract: The typical cost analysis of environmental
regulations 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 market power, as higher costs
of entry and investment can increase
concentration. I evaluate the welfare
effects of the 1990 Amendments to the Clean
Air Act on the US Portland cement industry,
accounting for these effects through a fully
dynamic model of oligopoly in the tradition
of Ericson and Pakes (1995). Using a
recently developed two-step estimator, I
recover the entire cost structure of the
industry, including the distribution of sunk
entry costs and adjustment costs of
investment. I solve for the Markov perfect
Nash equilibrium (MPNE) of the model and
simulate the welfare effects of the
Amendments. I find static analysis
understates costs by an order of magnitude,
and that the regulations impose a large
welfare penalty on producers and consumers,
primarily through a shift in the distribution
of the sunk costs of entry.
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