Academic journal article Journal of Economics and Finance

State-Imposed Solutions to Negative Externalities: Employment Impact of Pollution Abatement Policy

Academic journal article Journal of Economics and Finance

State-Imposed Solutions to Negative Externalities: Employment Impact of Pollution Abatement Policy

Article excerpt

Abstract Musgrave was acutely aware that many private activities, both consumption and production, generate negative externalities. Advocates for an active government rely on this concept to justify public sector regulation of private activities. Regulations and mandates, along with penalties for non-compliance, are the primary instruments used by government to bring about the "correct" level of output whenever private output gives rise to negative externalities such as environmental pollution. This study in effect offers a case study of the Clean Air Act on employment, i.e., it empirically investigates whether pollution abatement costs have had a negative impact on manufacturing employment in the U.S. Conventional microeconomic theory suggests that there is a trade-off between environmental protection outlays and manufacturing activity, i.e., higher pollution abatement compliance costs borne by industries may contribute to plant shutdowns, lower production levels and lay-offs, and/or lack of investment, thereby leading to diminished manufacturing employment. Existing studies fail to offer a clear conclusion as to the impact of existing environmental protection measures on manufacturing activity. Using state-level data for 2001, this study finds that government-imposed pollution abatement costs have had a statistically significant negative impact on manufacturing employment in the U.S.

Keywords Externalities * Pollution abatement costs * Manufacturing employment

JEL Classifications H23 * L50 * R38

1 Introduction

Among the many concerns Musgrave (1959) held was that of the divergence between private costs and social costs, i.e., "negative externalities." Musgrave (1959, p. 45) was acutely aware that "...difficulties arise where controls [government] are needed to cover divergences between social and private costs ..." Musgrave (1959, p. 45) provides an example: "The factory that causes a smoke nuisance may be required to raise the height of its chimney or to pay damages in the form of a tax used in turn to reimburse those who have suffered in the process." However, Musgrave (1959, pp. 45, 140) was also quite cognizant that determining exactly what the "optimal" tax for negative externalities should be is an onerous one. The latter difficulty is attributed at least in part to the fact that "There is no market mechanism by which collateral...costs can be determined; hence there is no basis on which to assess those who enjoy the benefits or to compensate those who suffer the loss..." associated with negative externalities (Musgrave 1959, p. 140). Musgrave's (1959) observations could well be interpreted as a prelude to the subsequent classic work by Buchanan and Stubblebine (1962).

The concern over negative externalities has manifested itself over the years in a variety of forms, including that of addressing environmental pollution. Following the implementation of the Clean Air Act of 1970 and the various amendments to this statute through 1990, pollution control, as well as environmental quality in general, have become an increasingly controversial political, economic, and social issue. Under the provisions of the Clean Air Act, the EPA requires all states to conform to national standards for air quality and to control the emissions for new sources of pollution (http://www.epa.gov). The Clean Air Act authorizes the EPA to establish "national ambient air quality standards" to significantly limit emissions of major polluting chemicals in the air and to use legal methods to make polluters comply with air pollution control policy. All areas in the U.S. are designated as either "attainment" or "non-attainment" areas, depending on whether the level of the criteria pollutants meets the established health-based standards. Those states classified as non-attainment areas are statutorily required to develop formal plans by which to achieve such standards, and if a state chooses not to form such a plan or does not successfully execute that plan by a specified date set by the EPA, the EPA is authorized to assume administration of the law for the state. …

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