The Costs of Environmental Regulation in a Concentrated Industry
Abstract
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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Large-scale environmental regulation may substantially increase the sunk costs for new entrants, deterring them from entering the market.
“Another argument is related to the restricted entry of competitors: A large-scale environmental regulation may substantially increase the sunk costs for new entrants, deterring them to come into the market (Ryan, Citation2012).”
From Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms' competitiveness? Empirical findings from the literature (2019) · cites this paper as Ryan, 2012
These sunk costs include costs for learning about the requirements of the EU ETS for entering into the allocation process, as well as entry costs for MRV of emissions.
“These sunk costs would include costs for learning about the requirements of the EU ETS for entering into the allocation process, as well as entry costs for MRV of emissions.”
From Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms' competitiveness? Empirical findings from the literature (2019) · cites this paper as Ryan, 2012
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Joltreau, E., & Sommerfeld, K. (2019) · Climate Policy · doi:10.1080/14693062.2018.1502145 · Cited by 183 · see citing works
“Another argument is related to the restricted entry of competitors: A large-scale environmental regulation may substantially increase the sunk costs for new entrants, deterring them to come into the market (Ryan, 2012).”
BackgroundReal Effects of Climate Policy: Financial Constraints and Spillovers
Bartram, S. M., Hou, K., & Kim, S. (2018) · SSRN Electronic Journal · doi:10.2139/ssrn.3262211 · Cited by 159 · see citing works
- Authors
- Ryan, S.
- Affiliations
- National Bureau of Economic Research (US)
- Corresponding author
- Stephen Ryan
- Venue
- Econometrica
- Publisher
- The Econometric Society
- Published
- 2012
- Volume
- 80
- Issue
- 3
- Pages
- 1019-1061
- ISSN
- 0012-9682 (ISSN-L)
- OpenAlex
- W2156006341
- Cited by
- 668
- References
- 0
- Citations by year
- 2026: 38 · 2025: 80 · 2024: 46 · 2023: 33 · 2022: 43 · 2021: 38 · 2020: 44 · 2019: 22 · 2018: 37 · 2017: 28 · 2016: 30 · 2015: 51 · 2014: 35 · 2013: 35 · 2012: 30
- FWCI
- 115.54
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Econometrica (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Merger and Competition Analysis
- Social Sciences › Business, Management and Accounting › Strategy and Management › Regulation and Compliance Studies
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Climate Change Policy and Economics
- Keywords
- environmental regulation, Clean Air Act Amendments of 1990, Portland cement industry, welfare costs, oligopoly, market entry, market power
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