Thursday, March 06, 2008

ECON 260: Comment Thread for 3/7

The textbook presents a discussion of effects of environmental regulation on productivity (recall -- productivity =output per worker, so improvements in technology or increases in the use of capital both might lead to productivity increases). Specifically, it presents three ways that regulation might increase productivity:
(1) It might improve "short-run efficiency of resource use."
(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."
And, it presents four ways that regulation might lower productivity:
(1) "Regulation imposes direct costs on regulated firms; these costs may crowd out investment in conventional capital."
(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."
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?

It seems to me that we rarely give new technology its due credit. Unable to anticipate whatever technology might soon sprout up, we rarely rely on it as a solution. Technology is supposed to respond to non-removable restrictions, however, and the sooner we implement regulations, the sooner we encourage development.

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.
In the long-run, one would hope that the policy implemented would be beneficial (otherwise, why do we do it?). Productivity would likely be increased as the technology developed to accommodate to regulation became wider-used and better developed.

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.
The relationship between regulation and productivity seems as if it could go in either direction. When we talk about how it might improve or lower productivity in any form I think it is important to acknowledge that the effects may be different in the long run and short run.

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 most important problems with regulation is its effect on entry into the market. Small businesses will likely be hit the hardest by big restrictions on resource use and pollution, because they have less capital, less money, less everything. I think It is important to address this since the more firms enter a market the more efficient the equilibrium price and quantity will be theoretically. For example, say a firm is entering the market around the time that a regulation is being imposed. It has likely taken out loans to purchase capital and is hoping to make enough profit to pay off its debts. The new policy restricts the amount of coal that can be burned in production. This firm must now face costs of finding alternative energy sources and will have significantly lower production and may not see profits for a long time.On the other hand, more established firms may have money saved up, or may have to slow production only slightly and will likely soon get over the costs. This system clearly does not encourage entry of new firms into the market. Like taxes for the environment, this too could prove regressive.
In response to Sonia's post, I think that regulations may actually encourage entry into the market. For example, if a company is only restricted to producing X amount of a product, and X is in high demand, then wouldn't it make sense it create another company that can produce more of good X? Sonia does bring up some good points about the potential for unexpected costs, but for firms that enter after a regulation has been put in place, I feel that it might be easier for them to establish themselves in the market (especially if they know what the regulations for production are going to be).

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 agree with Sonia in that I find the concerns about monopoly power developing to be the most pressing. Regulations will increase productivity by increasing investment in technology; however, only larger, more established firms will have the capability to do that R&D (assuming that the government is not funding R&D along with the regulation). Smaller firms may have to wait until someone else has developed the technology and is willing to share before they can hope to increase or even just maintain their productivity in the face of regulation. What makes this all the more troubling is the fact that regulations often impose high fixed costs that will prohibit entry by many new firms. They may not have the capital to pay for the newest and most efficient coal scrubbers, for example, and thus will not be able to enter the market. The smaller firms who were unable to access the improved technology fast enough to make their MB>MC of staying in production, will have left the market, leaving increased likelihood for monopoly power. With monopoly power comes an inefficient market and higher costs to consumers. I think that this problem could in large part be ameliorated if the government were to invest greatly in developing the technology necessary to make it possible for firms to maintain or increase productivity while harming the environment less.
In the short run, we certainly would expect upgrade costs to hit smaller firms harder than larger ones, but in the long run, demand for components of the new, cleaner production process should drive their cost down, and allow entry by smaller firms.

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.
I think "Breaching Dam Myths" perfectly illustrates that people (Army Corps of Engineers) often overestimate the costs of environmental regulation. Meanwhile, the benefits of environmental regulation is also being underestimated. The three ways that regulation actually boosts productivity, listed in the text book , are: improving short-term efficiency of resource use, encouraging firms to invest, and by reducing health care and clean-up costs. So while overestimated costs and underestimated benefits give regulation a bad face in local and national politics, regulation can actually increase worker productivity. One great example of how regulation might due this is the Frito Lay factory example. A major Frito Lay factory in Arizona has been working to invest money in new technologies for their factory, switching to solar power, vacuuming and recycling the extra water in the chips instead of baking them, and ultimately, taking themselves of the power grid. This example of improving efficiency is likely a result of regulation and consumer pressure, and might bring about lowered costs to run the plant, higher efficient use of resources, and maybe lowered health costs for employees - which actually might boost worker productivity in the long run.
In many cases the firms that are polluting the most and would be effected by environmental regulation are huge companies, not small businesses; therefore I don't think that market entrance is the biggest concern to productivity. Because these large firms have enough capital to invest in newer cleaner technologies, I think that environmental regulation can lead to greater productivity. Regulation motivating smart long-term investment is something that should be heavily considered when projections are made about regulation and productivity.
I think that focusing on the effects regulation has on productivity is similar to thinking of regulation in a jobs. vs. environment framework. While the impacts of regulation on productivity are important to some extent in determining weather or not to regulate, it seems that focusing too much on this issue distracts from the ultimate goal of regulations to provide long-term benefits to the population.
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.
I think that definitely in the short run that enforcing new environmental policies increases production costs. I think it is rare that a company would immediately begin implementing cleaner production technologies and change investment strategies. I feel that the much more likely response would be to raise the cost of goods produced. From what I've seen in this class and from a general econ perspective, I've always thought that is was kind of understood that implementing environmental policies increases the cost of goods in general, which is accepted on fairness and safety standard grounds. In that we are sacrificing monetary and economic benefits for greater health and natural rights.
It is important to acknowledge that the ways in which regulation could lower productivity are all short term and immediate impacts. When change occurs in a system, it is natural to find a lull or slight drop of productivity at the time in which the change occurs. The system, in this case, the economic system of firms, seems to be resilient and with time would recover for the lull caused by the regulation. On the other hand, the ways in which regulation would increase productivity are more long-term and permanent effects. In my opinion, these are more important because they act as change to the system that is beneficial and lasting. Encouraging firms to invest more and ‘smarter’ would lead to a gradual change. It is important to realize that not all benefits are immediate. Impose regulations now and suffer a little productivity loss and in the future the benefits will far outweigh the initial negative effects. Firms need to look at the big picture to realize the usefulness of regulations.
I think that Rosalie's comment about the long-run benefits not being properly considered was very well put.

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...
Seems to me that the question of regulation for productivity can only be answered for one specific industry at a time rather than to take a broad "pro-regulation" or "anti-regulation" for the whole economy.
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.
Lowering the productivity through regulations could be slightly more important, while these regulations also act as a change to the system they also can ultimately cause the need for improvemtents in technology and an increase in R&D. I find that the lowering of productivity by regulations through raising prices of "important economy wide inputs like energy and waste disposal" to be an leading issue. With increasing prices, firms are going to look for more efficient ways to continue production and while productivity may initially decrease this will encourage firms to find ways to increase productivity. You never know, a cheap way to launch our waste to the moon may develop from raising prices of waste disposal or other inputs.
I believe that the regulation regarding investment in new capital is of the upmost importance. New changes in technology would definitely lend some improvements in the amounts of energy and wastes that a firm/company may be producing. Even if these changes occur over a “slow” period of time, the long run effects are both beneficial to society and the firm/company. Therefore stringent regulation on pollution sources may actually benefit all those involved.
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.
I agree with Sonia and Elizabeth. We do need to pay attention to whether a regulation will turn out to be regressive. Especially because smaller firms do not have the resources to invest in creating new technologies. I also agree that the government should take a bigger role in aiding the development of these new technologies. If emphasis was put on creating technology that allowed for lower cost production with fewer environmental externalities maybe there wouldn't need to be so much regulation.
Small and large companies both have equal abilities to pollute, however due to economies of scale larger companies have an easier time investing in R&D. The willamette is a good example of smaller companies polluting for Portland has a signifigant amount of small businesses that contribute to the pollution. Technology should be designed and passed down to smaller businesses in order to stimulate a healthy or balanced market between larger and smaller companies.
In response to Daniel Cochran, it does seem that regulators do not assume advances in technology are likely when writing new legislation. However, in response to avoiding environmental responsibility, the reasoning that future technological advances will solve the problem is often used.

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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