Effects of Environmental Regulation and Urban Encroachment on California's Dairy Structure

By Sneeringer, Stacy E. | Journal of Agricultural and Resource Economics, December 2011 | Go to article overview

Effects of Environmental Regulation and Urban Encroachment on California's Dairy Structure


Sneeringer, Stacy E., Journal of Agricultural and Resource Economics


Environmental regulatory compliance costs are often cited as a factor in dairy location decisions, but few studies estimate the impacts of regulation in this sector. This article uses California dairy regulations to examine the pollution haven hypothesis in agriculture. Dairy industry regulation has varied regionally within the state, with the more strictly regulated Southern California region losing production and the more environmentally lenient Central Valley gaining production. Results show that even after controlling for population density and property values, regulation had significant negative effects on dairying in Southern California.

Key words: dairy, differences-in-differences, environment, livestock, regulation

(ProQuest: ... denotes formulae omitted.)

Introduction

The U.S. dairy industry has witnessed striking structural changes in the last several decades, coupled with increased geographic concentration and heightened scrutiny as a source of water and air pollution. Federal, state, and regional environmental regulations prompted by this scrutiny differ in stringency and application from region to region and may result in "pollution havens"-places where polluting industries locate to take advantage of relatively lenient environmental regulation. These havens have implications for regional economies, employment, and local tax revenues. Further, environmental regulations may have heterogeneous effects on differently-sized operations, impacting the industry's potential economies of scale. Despite these concerns, little research has econometrically estimated the effects of environmental regulation on location and structure in the dairy industry, and none have examined the effects of within-state heterogeneity in regulation.

California's dairy industry accounts for 20% of U.S. milk production (California Department of Food and Agriculture, 2007) and has generated significant environmental concerns. Studies have found dairies to be major contributors to ground and surface water pollution (California Regional Water Quality Control Board, Santa Ana Region, 1990). In response, California's regional water quality boards have adopted water quality regulations that differ between Southern California and the Central Valley, the state's two main dairy regions. Southern California's heavily populated Chino region adopted dairy water quality regulation in 1994 and increased stringency in 1999. In comparison, the Central Valley only adopted regulations on dairies that were more restrictive than state mandates in 2007 (California Regional Water Quality Control Board Central Valley Region, 2010). Concurrently, Southern California lost production, while the Central Valley gained, raising questions about the impact of regulation differences.

Omitted variable bias is a primary concern with regard to heterogeneous regulation effects on the location of economic activity. The presence of a polluting industry in a location with relatively lenient environmental regulation may be due to other factors such as less expensive labor or other inputs. In the case of California dairies, the primary potential covariate is urban development. Trade journals report that population growth and housing construction in Southern California encouraged local dairies to sell their property and relocate (Marsh, 2007; Molloy, 2004). By comparison, the Central Valley is less densely populated with lower property values and has experienced steady growth in dairy production. An important question is whether estimated effects of regulation are robust upon the consideration of property values.

I examine the effects of environmental regulation on the structure of the California dairy industry in terms of location and operation size by addressing three questions. First, what were the effects of regulation and urban encroachment on dairying in the Southern California? Second, did stricter regulations in Southern California encourage growth in the Central Valley?

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