Wednesday, October 19, 2005

Effective Environmental Regulation: Does Money Matter?

Economists like to estimate production functions. The education production function literature asks whether students' test scores rise when more money is spent on inputs such as teachers. Environmental economists who are interested in the role of regulation in mitigating externalities are about to have an opportunity to study whether "money matters".

The Bush Administration and the Republican Congress are looking to cut government expenditures to lower the deficit. "Republicans struggled on Wednesday to gain support for another round of domestic spending cuts, leaving uncertain the fate of legislation that was to have been debated on the floor of the U.S. House of Representatives on Thursday." You don't have to be a genius to forsee that the EPA will get itself
trimmed here.

When a regulatory agency loses $, what gets cut back? I have the feeling that the answer will be partially research grants to academics. But, this is a small % of their budget. If EPA has a few billion less dollars, does this lead them to curtail data collection? To monitor fewer polluters? How will the EPA prioritize how to use its finite budget to address air versus water versus hazardous waste challenges?

If polluting firms anticipate that EPA is scaling back (for example during the Reagan Administration EPA conducted fewer inspections than during the Carter years), how does this affect the incentives of such polluting firms to "green" their production processes?

Will EPA's threats no longer be credible if its budget is paired back? An optimist might say that activist environmental groups such as Robert Kennedy Jr. will use the court system to sue if they sense that the EPA is shirking on its monitoring job because of who its boss is and because of budget cuts.

It seems to me that environmental economists have a harder job in estimating "pollution production functions" than educational economists. I would like to know if we take away 1 billion dollars from the EPA does that mean that more pollution will subsequently be produced? What types of pollution? Where will it be emitted?

If the marginal productivity of the EPA in battling pollution is low then such anticipated budget cuts will have little brown consequences. But this is an empirical question!