Thursday, March 06, 2008
ECON 260: Comment Thread for 3/7
(1) It might improve "short-run efficiency of resource use."And, it presents four ways that regulation might lower productivity:
(2) It might encourage "firms to invest more, or invest 'smarter' for the long-run."
(3) It might "reduce health-care or firm-level cleanup costs, which then frees up capital for long-tun investment."
(1) "Regulation imposes direct costs on regulated firms; these costs may crowd out investment in conventional capital."In your opinion, which of these effects are likely most important? You may find it useful to discuss these issues in the context of a specific environmental regulation. Is regulation X likely to have positive/negative impacts on productivity? Is so, through which of the above mechanisms are these affects likely to occur?
(2) Investment in new capital may further slow "when regulation is more stringent for new sources of pollution."
(3) Regulation raises prices for "important economy wide inputs like energy and waste disposal", and these cost increases reduce investment in sectors not directly affected by the regulation.
(4) "Regulation may frustrate entrepreneurial activity."
It is also important to note the first argument presented for "decreasing production," as firms likely will incur costs for imposing regulations. The simple counter-argument to this, though, is that these costs are short-term in light of potential long term benefits.
If, and this is a big if, regulations are imposed nationally or even globally, these companies will be on an equal level playing field, and soon the restrictions will just be another part of the job.
It seems that the short-run implications of a regulation would depend on the type of regulation. What comes to mind off the top of my head would be the difference between an "output related externality" or a "resource use externality"/common goods problem.
Output related externalities, like pollution, would cause firms to have to invest in cleanup/less polluting production techniques. Such investments would not directly relate to the productive capacity of a firm. Instead, they'd likely crowd out investment in productive capital in the short run (when investment money goes to non-productive uses).
On the other hand, a resource scarcity based regulation seems much more likely to create more productive investment decisions. If firms are obligated to, for example, use less oil or water from stream, they will invest in technology that allows them the create the same amount of output with a smaller quantity of inputs (or substitute into another input that is cheaper (with regulation costs included). Even in the short run, though there may be a fixed cost to the change, productivity could still rise.
For example, with a regulation that includes a change in capital or new capital introduced, it seems to me that in the short run productivity may degrease, with it then increasing in the long run. This has to do with the idea of specialization and that it may take firms times to adjust to different capital.
The same idea goes as Daniel said about the short-term vs long-term costs/benefits of imposing regulations.
However, I also feel that since regulations are imposed on every firm and these firms are still competing against one another, the effects should essential offset each other and the idea of productivity may actually not be as important.
I think one of the important factors in regulations of productivity is the impact those regulations have on health-care costs. For example, there has been a trend lately for companies to provide compensation for employees that live healthier lifestyles. By promoting better health, not only are companies reducing their costs of health-care, but they are also encouraging their employees to learn more about how to live a healthy lifestyle (which seems to be positively correlated with keeping our environment healthy as well). Thus, by creating regulations that help reduce the cost of health-care, companies are able to kill two birds with one stone, increasing their company's productivity while also indirectly helping our environment become a cleaner place.
I think Scott's point about of the potential effects of different regulation types is lucid. If firms are faced only with restrictions on externality-creating outputs, they will not become more productive- they will either invest in clean production technologies until they no longer violate the regulation, or, depending on the relevant costs, simply scale down production until they cease to pollute an objectionable amount.
It seems important to focus on the long-term consequences of regulation on production rather than short-term issues.
While regulations may crowd out smaller firms or "frustrate entrepreneurial activity" in the short term, these problems will be off-set by longer term benefits in the long run that will be the result of improved conditions. It seems like the short-run costs on productivity are necessary if we hope to achieve change in the way industries operate and framing the issue of regulation as reducing productivity distracts from the created opportunities that will likely provide more lasting benefits.
In my opinion, the uncertainty present in typical cost-benefit analysis makes it unwise to er on the side of less than "safe" policy decisions. Honestly I don't see how the neoclassical idea which places natural capital equal to any capital is not accepted as exceedingly unreasonable. Maybe a framework that cannot find a proper way to weigh a human life should not be used to create policy that could harm generations to come. Likewise, maybe we'll find some really clever way to shoot our garbage to the moon...
I would guess that "regulation promotes productivity" would not occur as frequently. It makes the assumption that firms don't know how to maximize their profits. I believe this can happen sometimes, but i don't think we can expect this to apply for most firms.
Looking at this regulation in terms of productivity…In the beginning productivity would generally decrease, as firms try to find ways of integrating new technology into their productions. Yet, these effects seem like they would only matter in the short run. Given time, production would increase, back to original levels, or even greater, if advances in technology outweigh methods used in the past. Either way, I see this regulation as a benefit rather than a hindrance.
In response to the question at hand, to me it seems that the "frustration of entrepreneurial activity" would be the largest concern. However, I am extremely biased in that I put a lot of weight on a competitive marketplace. The idea of a single marketplace being controlled by just a few enormous corporations sounds inefficient and frightening.
Realistically it would depend on the situation and if the costs are astronomical it seems that the resources would be better allocated to solving another environmental problem.
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