Academic journal article American Journal of Entrepreneurship

Impact of Air Quality Regulations on Entrepreneurial Activity

Academic journal article American Journal of Entrepreneurship

Impact of Air Quality Regulations on Entrepreneurial Activity

Article excerpt

Introduction

The Environmental Protection Agency (EPA) Office of Air Quality Planning and Standards (OAQPS) has the authority to formally designate areas using the National Ambient Air Quality Standards (NAAQS) for major criteria pollutants and accordingly evaluate an area's attainment status. An area is deemed in attainment by the EPA when the air quality is monitored and the resultant concentrations are found to be consistently below the NAAQS. If the pollution limits are exceeded for several consecutive years, the EPA will designate an area as nonattainment. The area will subsequently be subject to more stringent regulatory requirements and polluting business will be required to adopt measures to alleviate the area's air quality. Therefore, not surprisingly, non-attainment status designations are increasingly becoming a major concern for regional economic viability and attractiveness as a location choice for new business/venture formations.

A considerable amount of literature exists on air quality regulation and its relationship to economic activity. Two distinct streams of research have emerged out of it. The first is the relationship between economic growth and the environment regulation known in the literature as the 'Environmental Kuznets Curve' (EKC)1. Although support from the empirical research is divided, the EKC is often offered as a rationale for encouraging economic growth as the best environmental policy option (Beckerman, 1992, Grossman and Krueger, 1993, 1995). Recent evidence shows, however, that the methodologies commonly used in EKC analysis contain important econometric weaknesses (Stern, et al., 1996; Stern 2004). Research addressing several of these weaknesses associated with the estimation of EKCs suggests that meaningful EKCs only exist for local air pollutants (Dinda, 2004; Millimet, et ah, 2003) but these results generally contain some positive bias (List and Gallet, 1999). Thus, the lack of conclusive empirical evidence proving that the EKC is an adequate guide for environmental policy-makers only strengthens the argument for more stringent regulations and enforcement.

The second stream focuses on the relationship between air quality and firm (manufacturing plants) location choices. The general theoretical assumption is that lax environmental regulatory standards attract capital flows (Kahn, 1997; List and Mason, 2001) and yet the empirical evidence is divided. Over the years, researchers have made significant progress in measuring the effects of federal environmental regulations on ambient concentration of several criteria pollutants and business location decisions11. These studies have varied by the time period, type of pollutant and level of data aggregation (county vs. monitor level studies). Although it is reasonable to assert that regulations matter, over the years studies on air quality regulation have found that local regulation has little or no effect on either air quality (MacAvoy, 1987) or business location decisions (Bartik, 1988; Duffy -Deno, 1992; McConnell and Schwab, 1990; Levinson, 1996). Even in recent years, air quality attainment status and plant location decisions have been found to be largely uncorrelated (List, et al, 1999), except for large manufacturing plants (Becker and Henderson, 2000; Henderson, 1996; Keller and Levison, 1999; List, 2001; List, et al. 2004) in which case, stricter standards are expected to lead to the creation of pollution havens"1 (List and McHone, 2000).

Some of the counter-intuitive results could in part be attributed to the use of crosssectional data and/or estimation methods. Cross-sectionally, the location of polluting activity, high concentration readings from certain monitors, and non-attainment status are all highly positively correlated. So the facts that air quality is worse in these areas, and that more polluting businesses are found there are not at all surprising. Panel estimation controls for this crosssectional correlation and therefore, is used to correctly measure how a change in attainment designation affects new business births (Henderson 1996). …

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