حسابداری برای از دست دادن تنوع و تخصیص مجدد فاکتورها Accounting for loss of variety and factor reallocations in the welfare cost of regulations

1. Introduction The direct burden of environmental regulations on regulated firms is often an imperfect measure of the social burden for a variety of reasons. Examples include interactions of regulations with the exercise of market power (Buchanan, 1969; Ryan, 2012; Fowlie et al., 2016) and pre-existing tax distortions (Bovenberg and de Mooij, 1994; Parry, 1995; Goulder et al., 1999; Fullerton and Metcalf, 2001; Goulder et al., 2016), and leakage due to incomplete regulation (Bernard et al., 2007; Holland, 2012). Despite empirical evidence that regulations cause some firms to cease operations and exit the market (Greenstone et al., 2012), studies generally abstract from firm entry-exit decisions, as well as changes in product variety. This paper adds to the literature by developing a model to account for the welfare cost associated with loss of variety and factor reallocations induced by environmental regulations, and explores the implications for optimal environmental policy. The model can be explained intuitively as follows. Consider an industry where firms produce differentiated goods, and differences in productivity generate differences in profits, where the least productive firm earns zero profits. In effect, environmental regulations, which induce or require firms to divert productive resources to pollution mitigation, increase cost. Firms that, prior to the change in regulations, were only “marginally” profitable would be rendered unprofitable after the change and would consequently exit the market. In addition to the direct compliance cost, regulations therefore generate two indirect effects. First, because ex-post active firms are on average more productive than ex-ante active firms, productive resources are reallocated from less to more productive firms, resulting in higher average productivity and in turn lower prices. Second, because firms produce differentiated goods, firms exiting the market represent a loss of variety to consumers, which reduces welfare. Because the two are confounding in nature, the direct burden of regulations might understate or overstate the true, or at least more comprehensive, welfare cost.