Study Reveals Often Overlooked Costs of Environmental Regulation

A recent technical article by MIT Associate Professor of Economics Stephen Ryan investigates how a particular set of environmental regulations, the 1990 Amendments to the Clean Air Act, affected the Portland cement industry.

Although the Amendments didn’t impose any new restrictions on pollutant levels, they did require firms in the industry to apply for permits, submit plans for monitoring compliance, and pay for certifications and environmental impact studies.  To residential developers, these general sorts of requirements probably sound quite familiar (they accounted for a significant fraction of the 25 percent of the price of a new home attributable, on average, to government regulation reported in NAHB’s 2011 article).

In his article, Ryan argues that simply adding up engineering estimates of the cost of permits, monitoring equipment, certification, and environmental impact studies overlooks the effect that the Clean Air Amendments have on the structure of the cement-producing industry.  The fixed costs they impose deter entry into the market, reduce the number of firms competing with one another, and ultimately drive up costs for consumers. Ryan estimates that failure to account for these industry-altering effects understates the economic costs of the regulation by at least $300 million.

The model he uses is designed to capture specific attributes of the Portland cement industry and therefore has limited direct application to a less concentrated industry like home building.  Cement is used in foundations, driveways, sidewalks, patios, stucco, and some types of brick, however—so anything that affects the price and availability of cement has some affect on residential construction.

Moreover, the general principle that environmental regulation has the potential to knock some businesses out of the market and reduce competition is relevant to home building.  The typical housing market is served by a variety of builders of different sizes, organizational structures, and areas of specialization.  When government agencies estimate the costs of a particular regulation, they don’t often consider differential impacts on particular types of builders and potential harm to competition in local market areas.  This has become a growing concern to NAHB in recent years.



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