The Impact of Environmental Regulation on Industry Location Decisions: The Motor Vehicle Industry

Abstract

Air pollution policy has moved steadily toward strict uniformity of regulations across regions. In particular, amendments to the Clean Air Act (CAA) and Environmental Protection Agency (EPA) rules in the 1970s and early 1980s have promoted a policy designed to reduce regional variation in air pollution controls required of industrial polluters. This policy was based on the premise that differences in environmental regulations would promote locational competition among regions. The fear was that polluting firms would migrate to clean areas where they would be subject to less stringent regulation; thus regions that had not met the federal standards would be unable to compete for new industry and jobs, and rents to existing industry would decline as industry chose less polluted locations. This argument is consistent, for example, with Pashigian's (1985) findings that Congressional voting on the PSD (prevention of significant deterioration) legislation in the late 1970s which levelled the playing field across regions, was motivated primarily by this fear of locational competition. Hence, much of regional environmental policy has been based on the premise that many firms place a heavy weight on regional environmental policy when choosing a location. Currently, however, there is little empirical evidence on either the extent of regional variation in pollution reduction requirements or on the extent to which that variation affects industry location decisions. The issue is of critical importance because environmental policy which is uniform across regions is likely to have a high social cost, compared with one that accounts for differences in abatement costs and benefits among regions (see Baumol and Oates 1988). In this paper we use a conditional logit model to examine the impact of a variety of county characteristics on the locations of 50 new branch plants in the motor vehicle industry during 1973-82, a period when there was still substantial variation in envi-