The Dynamics of the Marginal Cost of Reducing Air Pollution in Beijing, China

The NY Times has published a very interesting piece on the unintended consequences of Clean Air regulation in China.   The piece makes some excellent points and then at the end of the piece it takes a punch at the autocratic state.   Permit me to make some economics points that build on the piece.

The author is correct about the short run costs of compliance with the regulation but in the medium term and long term several market and firm level adjustments will take place that will sharply reduce the cost of compliance with this regulation. 

For example, the author says that in the short run that the supply of natural gas (the clean fuel) is inelastic so rising demand for this fuel raises the price of natural gas and this raises costs for small businesses.  But, Alaska has a major LNG port and can ship such gas to China.  This will soon occur and the medium term supply of natural gas to China will be much more elastic and thus higher demand will not translate into higher prices for this clean fuel.

Second, the author does not discuss industrial organization. As the price of energy rises, there will be some firms in the same industry who figure out how to produce more efficiently and thus will suffer a smaller marginal cost increase induced by the regulation. The author is implicitly assuming that energy is "Leontief" in the isoquants and that all firms in the same industry have the same production technology.  This is false. 

In our work on China, the median urbanite wants cleaner air --- while there is no free lunch the government is responding to this pressure by increasing the supply of such public goods.  The author of this piece may be correct that the "little guys" in business bear the incidence of this regulation but this doesn't mean that the regulation is bad.  I think that PHD economists should further explore this economic incidence point.

Here are my relevant papers on this topic.

1.  Siqi Zheng & Matthew E. Kahn, 2017. "A New Era of Pollution Progress in Urban China?," Journal of Economic Perspectives, American Economic Association, vol. 31(1), pages 71-92, Winter.
2.  Matthew E. Kahn & Pei Li & Daxuan Zhao, 2015. "Water Pollution Progress at Borders: The Role of Changes in China's Political Promotion Incentives," American Economic Journal: Economic Policy, American Economic Association, vol. 7(4), pages 223-242, November.
3.  Zheng, Siqi & Kahn, Matthew E. & Sun, Weizeng & Luo, Danglun, 2014. "Incentives for China's urban mayors to mitigate pollution externalities: The role of the central government and public environmentalism," Regional Science and Urban Economics, Elsevier, vol. 47(C), pages 61-71.
4.  Sun, Cong & Kahn, Matthew E. & Zheng, Siqi, 2017. "Self-protection investment exacerbates air pollution exposure inequality in urban China," Ecological Economics, Elsevier, vol. 131(C), pages 468-474.