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The short-run impact of environmental protection costs on U.S. product prices
JOURNAL
OF ENVIRONMENTAL
ECONOMICS
AND MANAGEMENT
l&380-390
(1984)
The Short-Run Impact of Environmental Protection Costs on U.S. Product Prices CARL A. PASURRA, JR. Department of Economics, Southern Illinois University, Carbondale, Illinois 62901 Received January 18,1982; revised August 1982 and April 1983 Using an input-output framework, this paper investigates the magnitude of the impact that environmental protection costs had on prices in the United States in 1977. With the imposition of environmental protection costs, the projected total price increases for individual industries range from 0.12% to 6.58%. Due to data limitations, the constraints of input-output analysis, and the structural changes that occurred in the economy from 1972 to 1977, the results should not be taken as definitive. Howver, the results do indicate the typical sort of variation in impact likely to occur across industries and that the average impact on prices was modest. o 1984 Academic
Press, Inc.
1. INTRODUCTION
One of the major issues of recent years has been the debate over the seriousness of the impact of pollution on the environment. As a consequence of new legislation, firms and individuals have been forced to internalize certain costs that formerly had not been recognized. The internalization of these costs by business had led some individuals to argue that the burden imposed by environmental regulations is excessive. In his 1981 State of the Union address, President Reagan stated that while “we have no intention of dismantling the regulatory agencies, especially those necessary to protect the environment . . . we must come to grips with inefficient and burdensome regulations-eliminate those we can and reform the others” [9]. There have been several attempts, which utilized an input-output framework, to analyze the impact of environmental protection costs on product prices. Leontief and Ford [ll] specified a short-run input-output model to project the impact of the 1967 Clean Air Act, using four different scenarios, on price levels in the United States. Walter [30] developed a partial equilibrium input-output framework to calculate the effect of pollution abatement expenditures, using pollution abatement expenditure data for 1971, on U.S. trade. Mutti and Richardson [13,14] used Walter’s [30] data for a short-run input-output analysis, along with several more sophisticated input-output models, to investigate the impact of environmental protection costs on U.S. prices and output. Hollenbeck [lo] constructed a 17-sector model of the U.S. economy in 1973 in order to analyze the impact of pollution abatement expenditures needed to meet the standards set by the 1970 Clean Air Act Amendments. den Hartog and Houweling [7] utilized an input-output model to project the intermediate and long-run impact of pollution abatement expenditures on price levels in the Netherlands. There have been six [2-6,8] macroeconomic simulations of the impact on the U.S. economy of environmental control costs needed to meet Federal environmental regulations. These studies only investigated the aggregate impact of pollution 380 0095~0696/84 $3.00 Copyright 0 1984 by Academic Press, Inc. Au rigbt.9 of reproducticm in any form reserved
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abatement expenditures. Portney [17] discusses some of the difficulties encountered in conducting these macroeconomic simulations. In addition, there have been several studies [28] that attempted to determine the magnitude of the direct impact of environmental regulations on certain specific industries. These initial attempts to analyze the impact of environmental protection costs on prices were hampered by the sparseness of disaggregated data on pollution abatement expenditures. The data on expenditures for pollution abatement used in this study have not, heretofore, been exploited. This study is concerned with the effect of environmental protection costs on U.S. product prices in 1977. Section 2 of the paper presents the short-run input-output model that is used to analyze the impact of U.S. environmental protection costs on product prices in the United States. Section 3 discusses the empirical results and compares them with those found in previous studies on the impact of pollution abatement expenditures on U.S. product prices. Section 4 summarizes the paper and investigates some of the policy implications.
2. THE MODEL
This section specifies the partial equilibrium input-output framework that is used to analyze the short-run impact of environmental protection costs on prices. The advantage of using an input-output framework to analyze the impact of environmental protection costs is that the effects of the environmental protection costs that are passed along in the form of higher prices of intermediate goods can be observed. The following set of equations, in matrix form, specify how prices are determined using an input-output model: p = A&p + A’,q + V,
(1)
where p = n x 1 vector of domestic product prices, q = n X 1 vector of import product prices, A& = transpose of n X n domestic input-output Ah = transpose of n X n import input-output
matrix, matrix,
V = n x 1 vector of value added as a percentage of output. Solving equation (1) for p gives the following: p = [I - A&]-‘(Abq
+ V).
(2)
In the initial situation, all product prices are unitary. In this study, foreign product prices, q, are assumed to be constant because this study is concerned with the impact of environmental protection costs borne by U.S. firms. In addition, value added as a percentage of output, V, is assumed to remain constant for each industry sector. The imposition of environmental protection costs is introduced into the model as an increase in the value added coefficient of an industry. As a result, in order to
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detect the total influence of the imposition of environmental protection costs on product prices in the United States, it is necessary to modify Eq. (2) in the following manner:
p’ = [I - A&]-lE,
(3)
where p’ = n X 1 vector of the total percentage increase in product prices per unit of
output due to the imposition of environmental protection costs (measures the percentage increase in prices because p is set at unity in the initial situation), E =n X 1 vector of direct environmental protection costs (current account) per unit of output. This model assumes that supply elasticities are infinite. As a consequence, all increased costs due to environmental protection are passed along in the form of higher prices. The analysis is termed “short-run” because it does not consider the possible impact of environmental control costs on capital formation and growth. However, microeconomic theory maintains that all of the added costs incurred by producers cannot be passed on to consumers in the short run unless the price elasticity of demand is zero. All costs can be passed on in the long run, however, assuming unrestricted exit from a constant-cost industry (having a horizontal long-run supply curve). The assumption of fixed input-output coefficients, when there are changes in relative prices due to environmental protection costs, leads to imprecise results. If the value of an intermediate input is a constant proportion of the value of the output, then a change in the relative price ratio of the intermediate input and the output is likely to cause a change in the input-output coefficient. However, it would take a full general equilibrium model to determine the eventual consequences for each sector of the economy. It is also assumed that the input-output coefficients were constant from 1972 to 1977. This assumption is necessary because of the long time lag involved in publishing the input-output table. Obviously, any changes that occurred in the input-output coefficients from 1972 to 1977 will lead to inaccurate conclusions in this paper. The 1972 U.S. input-output table [18] and data on final demand in 1977 [26] are used to project sector outputs in 1977. Vaccara [29] and Bezdek and Wendling [l] discuss the procedures and problems on updating an input-output matrix. Stone [22] and the United Nations Department of Economic and Social Affairs [24] contain additional discussions of the procedures used in input-output analysis. Appendix A contains a discussion of the 1972 U.S. input-output matrix that is used in this study. The method of projecting 1977 commodity output is also discussed. The pollution abatement data used in this study are current account expenditures by U.S. firms in 1977. The data are collected by the U.S. Bureau of the Census [27]; Rutledge and Trevathan [19]; Rutledge, Dreiling and Dunlap [20]; and the National Science Foundation [15,16]. Appendix B contains a discussion of the pollution abatement data that are used in this study. Both appendixes are available from the author on request.
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The manner in which environmental control costs are entered into this framework implicitly assumes that all current account costs for pollution abatement can be considered part of the value added component of the U.S. input-output table. Tybout [23] provides an excellent survey of the various proposals and problems of incorporating pollution abatement expenditures into the national income accounts. Technically, only labor costs and depreciation incurred in abating pollution are included in the value added component. Intermediate inputs that are used in pollution abatement activities should be introduced by modifying the input-output coefficients. Lowe [12] and Steenge [21] contain the most recent discussions of how input-output tables should be modified to allow for an analysis of the impact of environmental protection costs on prices. However, the existing data are insufficient to allow for this type of analysis. It is also assumed that all other components of value added remain constant with the imposition of environmental regulations. This implicitly assumes that all resources used to abate pollution were previously unemployed. However, it is likely that some of the intermediate inputs and components of value added that are used in abating pollution were formerly used to produce conventional goods and services. As a consequence, it is likely that other components of value added will change with the imposition of environmental regulations. The next section will discuss the results generated by Eq. (3). 3. EMPIRICAL
RESULTS
This section will first present the empirical results that are obtained in this study. Then the results of this study are compared with the results obtained by previous studies. Table I lists the results obtained from the partial equilibrium approach that this study uses to forecast the impact of environmental protection costs (EPC) on U.S. product prices. Direct EPC (column 1) lists environmental protection costs as a percentage of output for each sector. This measures the direct increase in production costs. Total EPC (column 2) lists the percentage increase in prices generated by Eq. (3) that occur because environmental protection costs are borne by U.S. industry. Total EPC measures the impact of direct environmental protection costs plus the costs due to environmental protection that are passed along through the intermediate products that are used in each sector. The weighted average of Direct EPC (column 1) is 0.42% and the weighted average of Total EPC (column 2) is 0.97%. The following sectors have Direct EPC (column 1) and Total EPC (column 2) of 1.00% or greater: 1. 2. 3. 4. 5. 6.
Iron and feroalloy ores mining (I-O 5) Crude petroleum and natural gas (I-O 8) Paper and allied products, except containers (I-O 24) Chemicals and selected chemical products (I-O 27) Primary iron and steel manufacturing (I-O 37) Electric, gas, water, and sanitary services (I-O 68)
The short-run input-output model is useful in determining which sectors experience the largest total increase in costs relative to the direct costs of environmental
CARL A. PASURKA,
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TABLE I Percentage Increase in Prices with the Imposition of Environmental Protection Costs I-O
1 2 3 4 5 6
I 8 9
10 11 12 13 14 15 16 17
18 19 20 21 22 23 24 25 26 21 28 29 30 31 32 33 34 35 36 31 38 39
40 41 42 43
44 45
46 47 48 49
50 51 52 53
Input-output
sector
Livestock and livestock products Other agricultural products Forestry and fishery products Agricultural, forestry, and fishery services Iron and feroalloy ores mining Nonferrous metal ores mining Coal mining Crude petroleum and natural gas Stone and clay mining and quarrying Chemical and fertilizer mineral mining New construction Maintenance and repair construction Ordinance and accessories Food and kindred products Tobacco manufactures Broad and narrow fabrics, yarn and thread mills Miscellaneous textile goods and floor coverings Apparel Miscellaneous fabricated textile products Lumber and wood products, except containers Wood containers Household furniture Other furniture and fixtures Paper and allied products, except containers Paperboard containers and boxes Printing and publishing Chemicals and selected chemical products Plastics and synthetic materials Drugs, cleaning and toilet preparations Paints and allied products Petroleum refining and related industries Rubber and miscellaneous plastics products Leather tanning and finishing Footwear and other leather products Glass and glass products Stone and clay products Primary iron and steel manufacturing Primary nonferrous metals and manufacturing Metal containers Heating, plumbing, and structural metal products Screw machine products and stampings Other fabricated metal products Engines and turbines Farm and garden machinery Construction and mining machinery Materials handling machinery and equipment Metal working machinery and equipment Special industry machinery and equipment General industrial machinery and equipment Miscellaneous machinery, except electrical Office, computing, and accounting machines Service industry machines Electric industrial equipment and apparatus
Direct EPC
Total EPC
0.00
0.49
(4 0.00
0.44
(b) 1.94
2.67
;; 2.21
3.69
1; 0.07
0.42
(4 0.22 0.15 0.06 0.13
0.09 1.55 0.12
0.71 0.66 0.33 1.06 1.09 0.58 0.65 0.69 0.62 0.66 0.70 2.56 1.33
0.10
0.81
2.08 0.94 0.21 0.22
3.38 2.40 0.83
0.15 0.02 0.00
0.18 0.10 0.13
(4 0.19 0.56 0.05 0.26 0.68 1.29 0.73 0.21 0.09 0.13 0.19 0.26 0.19
0.18 0.07 0.07 0.13 0.14 0.13 0.08 0.17 0.16
1.46 1.02 1.30 0.64 0.95 1.55 2.35 2.00 1.34
1.00 1.01 0.93 0.96 0.85 0.83 0.71 0.57 0.72 0.77 0.71 0.47 0.80 0.77
ENVIRONMENTAL
PROTECTION
TABLE I-O 54 55 56
57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 15 76 77 78 79
Input-output
I-
385
COSTS
Conhwed
sector
Household appliances Electrical lighting and wiring equipment Radio, TV, and communication equipment Electronic components and accessories Misc. electrical machinery and supplies Motor vehicles and equipment Aircraft and parts Other transportation equipment Scientific, and controlling instruments Optical, ophthalmic, and photographic equip. Miscellaneous manufacturing Transportation and warehousing Communications, except radio and TV Radio and TV broadcasting Electric, gas, water, and sanitary services Wholesale and retail trade Finance and insurance Real estate and rental Hotels, personal and repair services excluding auto Business services Eating and drinking places Automobile repair and services Amusements Medical, education services and nonprofit org. Federal Government enterprises State and government enterprises
Direct EPC
Total EPC
0.15 0.16 0.10 0.19 0.21 0.57 0.25 0.14 0.08 0.27 0.09 0.18 (4 (4 5.00 (4 (4 0.00 (4 (4 (4 (4 0.00 0.00
0.82 0.76 0.51 0.70 0.86 1.32 0.72 0.81 0.55 0.75 0.75 0.55 6.58 0.12
0.25 0.35
Notes on Aggregukwz: (a) included in I-O 1; (b) included in I-O 3; (c) included in I-O 5; (d) included in I-O 11; (e) included in I-O 8; (f) included in I-O 68.
protection. The following sectors, which have Direct EPC (cohunn 1) greater than zero, have Total EPC (column 2) which are at least 10 times greater than Direct EPC (column 1): 1. 2. 3. 4. 5.
Apparel (I-O 18) Paperboard containers and boxes (I-O 25) Footwear and other leather products (I-O 34) Heating, plumbing, and structural metal products (I-O 40) Materials handling machinery and equipment (I-O 46)
The following sectors have Total EPC (column 2) which are no greater than twice Direct EPC (column 1): 1. 2. 3. 4.
Iron and feroalloy ores mining (I-O 5) Crude petroleum and natural gas (I-O 8) Paper and allied products, except containers (I-O 24) Chemicals and selected chemical products (I-O 27)
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CARL A. PASURKA,
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5. Primary iron and steel manufacturing (I-O 37) 6. Electric, gas, water, and sanitary services (I-O 68) These sectors experience the smallest total increase in costs relative to the direct costs incurred in meeting environmental standards. The largest Direct EPC (column 1) and Total EPC (column 2) occurs in Electric, gas, water, and sanitary services (I-O 68). Real estate and rental (I-O 71) has the smallest Total EPC (column 2) with a value of 0.12%. Motor vehicles and equipment (I-O 59) has a projected total price increase of only 1.32%; however, this study excludes that portion of pollution abatement expenditures that are borne directly by consumers. Personal consumption expenditures for pollution abatement are those current account expenditures by consumers for automobile pollution abatement. In 1977, personal consumption expenditures for pollution abatement (nondurable goods and services) were 3.17% of domestic final demand expenditures for Motor vehicles and equipment (I-O 59). It is not surprising that these sectors whose production processes generate relatively large amounts of pollutants per unit of output incur the largest direct environmental control costs per unit of output. Those sectors with the largest direct environmental control costs also have the largest total price increases. In addition, those sectors that use as intermediate inputs relatively large amounts of the output of those sectors with large direct environmental control costs experience relatively large percentage differences between total and direct environmental protection costs. Six [2-6,8] macroeconomic simulations have attempted to ascertain the impact of incremental pollution control costs (PCC) on the U.S. economy. Incremental costs are expenditures made for abating pollution that are mandated by federal environmental legislation. These costs are those that are beyond what would have been incurred in the absence of federal legislation. The U.S. Council on Environmental Quality (CEQ) [25] collected aggregate data on the difference between incremental and total pollution abatement expenditures in 1977. The data on pollution abatement expenditures consists of operation costs, maintenance costs, and capital costs (interest plus depreciation). Total pollution abatement expenditures in the U.S. economy were $39.9 billion, of which $19.3 billion were incremental costs. This includes public and private expenditures for abating the following types of pollution: (1) radiation, (2) air, (3) solid waste, (4) water, (5) land reclamation, (6) toxic substances, and (7) noise. Total pollution abatement expenditures by private industry in 1977 for air, water, and solid waste abatement were $19.2 billion, of which $11.5 billion were classified as incremental costs. Among the items calculated by the macroeconomic simulations was the growth rate of the consumer price index. Table II lists the percentage difference ,in ‘the growth rate of the consumer price index (CPI) in 1977 between the simulation with pollution control costs and the simulation without pollution control costs. The two studies conducted by Data Resources [5,6] are the only macroeconomic simulations using historical data for 1977. The data used in this study consists of total pollution abatement expenditures to eliminate air, water, and solid waste pollution. Since incremental costs are slightly greater than one-half of total costs, the aggregate results of this study seem reasonably close to those obtained by Data Resources [5,6]. Only the Chase Econometrics study in 1976 [4] projected that pollution -control costs would have a larger impact on prices than the results presented here.’
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COSTS
TABLE II Macroeconomic Simulations of Growth Rate of CPI for 1977, with or without Pollution Control Costs
Chase Econometrics [2] Evans [ 81 Chase Econometrics [3] Chase Econometrics [4] Data Resources [5,6]
Without PCC (W)
With PCC (S)
Differences (W)
4.17 3.37 6.0 7.2 6.2
3.80 3.42 6.4 8.3 6.5
-0.37 0.05 0.4 1.1 0.3
Hollenbeck [lOI found that although there were great variations among sectors, the consumer price index rose by only 0.02% and 0.35% in two separate simulations. These aggregate results are lower than the result of my study because Hollenbeck [lo] was investigating the impact of expenditures to abate only air pollution in 1973. Public utilities exhibited the greatest price increases of 2.58 and 7.00%. Primary steel and iron manufacturing experienced price increases of 0.38 and 1.91%. My results show a 6.58% price increase for Electric, gas, water, and sanitary services (I-O 68) and a 2.35% price increase for Primary iron and steel manufacturing (I-O 37). Hollenbeck also found that the following sectors experienced price declines: (1) Paper and allied products and (2) Chemicals and plastics. These prices were lower because a decline in unit labor costs offset the increased capital costs caused by environmental regulations. My results indicate that both of those sectors are among the six sectors experiencing the largest price increases. Mutti and Richardson [13] calculated the percentage increases in prices because of environmental protection costs utilizing six different simulations. Each simulation represented a different financing scheme and assumption about domestic supply elasticities. The aggregate change in prices was obtained by weighting the industry price changes by their output shares of precontrol total output. The weighted aggregate results of the six different simulations are shown in Table III. The polluter pays model with infinite domestic elasticities of supply is identical to the model specified in this paper. The average price increase of 1.75% found by Mutti and Richardson is higher than the average price increase of 0.97% found here. The difference in surprising because pollution abatement .expenditures were increasing throughout the 1970’s. Part of the difference exists because the pollution abatement expenditure data utilized by Mutti and Richardson included a measure of the opportunity cost of the capital stock used for pollution abatement. Because of the lack of information about the capital stock for pollution abatement, I did not attempt to estimate this factor. Mutti and Richardson [13] found that the following sectors had the largest percentage increases in prices: 1. 2. 3. 4. 5. 6.
Plastics and synthetic materials (I-O 28) : 4.18% Paints and allied products (I-O 30) : 5.12% Petroleum refining and related industries (I-O 31) : 4.78% Scientific and controlling instruments (I-O 62) : 4.54% Optical, ophthalmic and photographical equipment (I-O 63) : 4.31% Electric, gas, water, and sanitary services (I-O 68) : 5.37%
388
CARL A. PASURKA,
Mutti-Richardson
All k’s = 00 d’s 5 cm
JR.
TABLE III Results: Aggregate Percentage Price Increases Polluter pays
Value added tax
1.75 1.26
1.51 1.26
Production tax 1.52 1.25
Note: E’‘s = Domestic supply elasticities.
In addition to projecting a larger aggregate price increase than my paper does, the Mutti and Richardson results yielded different sectors that had the largest price increases. Of the six sectors found to have the largest price increases in my study, only the following two were among the six sectors with the largest price increases in the Mutti and Richardson study: (1) Crude petroleum and natural gas (I-O 8) includes Petroleum refining and related industries (I-O 31), and (2) Electric, gas, water, and sanitary services (I-O 68). There have been several microeconomic simulations conducted for the Environmental Protection Agency [28]. A study of the copper industry predicted a 5.3% increase in copper prices in 1977 due to environmental regulations. The results reported here show a 2.00% price increase for Primary nonferous metals manufacturing (I-O 38). A study of the paper industry predicted that prices would be 6% higher due to environmental protection costs in 1983 compared to 1975. The present results indicate that Paper and allied products, except containers (I-O 24) had a 2.56% price increase; and Paperboard containers and boxes (I-O 25) experiences a 1.33% price increase. A study of the electric power industry predicted a 6.7% price increase between 1975 and 1983 because of environmental control costs. The results presented here indicate that the price increase associated with pollution abatement expenditures by Electric, gas, water, and sanitary services (I-O 68) was 6.58%. Finally, a study of the steel industry predicted that prices in 1983 would be 4.6% higher than in 1975 due to environmental regulations. The estimates in this study indicate a price increase in Primary iron and steel manufacturing (I-O 37) of 2.35%. The previous empirical studies utilized a variety of methodologies to analyze the impact of pollution abatement expenditures on prices in the United States. The price increases I found were substantially lower than those found when separate industries were analyzed. However, with the possible exception of the Mutti and Richardson results, the projected price increases yielded by this study are of approximately the same magnitude as those found by the remaining previous studies. 4. CONCLUSION
The interpretation of the results must be tempered by the knowledge that certain assumptions were made in conducting the input-output analysis. The assumption of fixed input-output coefficients has distorted the results; however, it is difficult to determine the extent and direction of this impact. The use of the simple input-output framework assumes that all environmental control costs incurred by firms are passing along in the form of higher prices. This study ignores the impact of pollution
ENVIRONMENTAL
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abatement expenditures on capital formation and growth. It also ignores the benefits of improved environmental quality that come about as a results of environmental regulations. The purpose of this paper was to investigate the magnitude of the increase in U.S. product prices that accompanied the imposition of environmental protection costs in 1977. It was found that the total price increases ranged from 0.12% for Real estate and rental (I-O 71) to 6.58% for Electric, gas, water and sanitary services (I-O 68). The average weighted price increase was found to be 0.97%. The results of this study indicate that for most industry sectors in the United States, environmental protection costs did not result in significant price increases in 1977. It is unlikely that a significant amount of the inflation experienced by the United States in recent years was caused by the costs of meeting environmental regulations. In addition, it is unlikely that the increased costs experienced by U.S. firms put them at a competitive disadvantage in world markets. This is especially true now that other nations have begun to implement their own environmental regulations. The one impact of pollution abatement expenditures that is beyond dispute is that they have caused changes in the relative prices among industry sectors in the economy. ACKNOWLEDGMENTS This paper is based upon a portion of my Ph.D. dissertation at the University of Illinois at Urbana-Champaign. I wish to thank the members of my dissertation committee, Robert W. Gillespie, George Judge, and Marvin Frankel, for their helpful suggestions. The author also wishes to thank two anonymous referees for their helpful suggestions. Of course, any remaining errors are my sole responsibility.
REFERENCES 1. R. Bezdek and R. M. Wendling, Current-and constant-dollar input-output forecasts for the U.S. economy, J. Amer. Statist. Assoc., 71, 543-551 (1976). 2. Chase Econometrics Associates Inc., The general economy, in “The Economic Impact of Pollution Control: A Summary of Recent Results,” U.S. Gov’t. Printing Office, Washington, D.C. (1972). 3. Chase Econometrics Associates Inc., “The Macroeconomic Impacts of Federal Pollution Control Programs: 1975,” U.S. Gov’t. Printing Office, Washington, D.C. (1975). 4. Chase Econometrics Associates Inc., “The Macroeconomic Implications of Federal Pollution Control Programs: 1976 Assessment,” U.S. Gov’t. Printing Office, Washington, D.C. (1976). 5. Data Resources Inc., “The Macroeconomic Impact of Federal Pollution Control Programs: 1978 Assessment,” U.S. Gov’t. Printing Office, Washington, D.C. (1979). 6. Data Resources Inc., “The Macroeconomic Impact of Federal Pollution Control Programs, 1981 Assessment,” U.S. Gov’t. Printing Office, Washington, D.C. (1981). 7. H. den Hartog and A. Houweling, Pollution, pollution abatement, and the economic structure of the Netherlands, in “Advances in Input-Output Analysis” (K. Polenske and J. Skolka, Eds.), Balhnger, Cambridge, Mass. (1976). 8. M. Evans, A forecasting model applied to pollution control costs, Amer. Econ. Rev., Papers Proc. 63, 244-252 (1973). 9. Facts on File Inc., Transcript of President Reagan’s Address on the Economic Recovery of the U.S., Facts on File Yearbook: 1981 40,100-102 (1982). 10 K. Hollenback, The employment and earnings impacts of the regulation of stationary source air pollution, J. Environ. Econom. Manag. 6,208-221 (1979). 11. W. Leontief and D. Ford, Air pollution and the economic structure: Empirical results of input-output computations, in “Input-Output Techniques” (A. Brody and A. P. Carter, Eds.), North-Holland, Amsterdam (1972). 12. P. D. Lowe, Pricing problems in an input-output approach to enviromnental protection, Rev. Econom. Star& 61,110-117 (1979).
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13. J. H. Mutti and J. Richardson, Industrial displacement through enviromnental controls, in “Studies in International Environmental Economics” (I. Walter, Ed.), Wiley, New York (1976). 14. J. H. Mutti and J. Richardson, International competitive displacement from environmental control: The quantitative gains from methodological refinement, J. Environ. Econom. Munag. 4, 135-152 (1977). 15. National Science Foundation, Research and Development in Industry; 1976: Funds, 1976; Scientists and Engineers, January, 1977,” U.S. Gov’t. Printing Office, Washington, D.C. (1978). 16. National Science Foundation, “Research and Development in Industry; 1977: Funds, 1977; Scientists and Engineers, January, 1978,” U.S. Gov’t. Printing Office, Washington, D.C. (1979). 17. P. R. Portney, The macroeconomic impacts of federal enviromnental regulation, Nutur. Resour. J. 21, 459-488 (1981). 18. P. M. Ritz, The input-output structure of the U.S. economy, Survey Current Business 59, No. 2, 34-72 (1979). 19. G. L. Rutledge and S. L. Trevathan, Pollution abatement and control expenditures, 1972-78, Survey Current Business 60, No. 2, 27-33 (1980). 20. G. L. Rutledge, S. L. Trevathan, F. J. Dreiling and B. C. Dunlap, Capital expenditures by business for pollution abatement, 1973-77 and planned 1978, Survey Current Business 58, No. 6, Part 1, 33-38 (1978). 21. A. Steenge, Environmental repercussions and the economic structure: Further comments, Rev. Econom. Statist. 60,482-486 (1978). 22. R. Stone, “Input-Output and National Accounts,” OECD, Paris (1961). 23. R. A. Tybout, Social accounting for pollution, Land Econom. 57, 507-525 (1981). 24. United Nations Department of Economic and Social Affairs, Statistical Office, “Input-Output Tables and Analysis,” Series F, No. 14, Rev. 1, United Nations, New York (1973). 25. U.S. Council on Environmental Quality, “Environmental Quality-1978,” U.S. Gov’t. Printing Office, Washington, D.C. (1978). 26. U.S. Department of Commerce, National income and product tables, Survey Current Business 59, No. 7, 15-23 (1979). 27. U.S. Department of Commerce, Bureau of the Census, “Pollution Abatement Costs and Expenditures: 1977,” Current Industrial Reports, MA-200, U.S. Gov’t. Printing Office, Washington, DC. (1979). 28. U.S. Senate, Committee on Environmental Public Works, “The Status of Environmental Economics: An Update,” U.S. Gov’t. Printing Office, Washington, D.C. (1979). 29. B. N. Vaccara, An input-output method for long-range economic protections, .Surcq Current Business 51, No. 7, Part 1, 47-56 (1971). 30. I. Walter, The pollution content of American trade, Western Econom. .I. 11, 61-70 (1973).
‘I
,*
OF ENVIRONMENTAL
ECONOMICS
AND MANAGEMENT
l&380-390
(1984)
The Short-Run Impact of Environmental Protection Costs on U.S. Product Prices CARL A. PASURRA, JR. Department of Economics, Southern Illinois University, Carbondale, Illinois 62901 Received January 18,1982; revised August 1982 and April 1983 Using an input-output framework, this paper investigates the magnitude of the impact that environmental protection costs had on prices in the United States in 1977. With the imposition of environmental protection costs, the projected total price increases for individual industries range from 0.12% to 6.58%. Due to data limitations, the constraints of input-output analysis, and the structural changes that occurred in the economy from 1972 to 1977, the results should not be taken as definitive. Howver, the results do indicate the typical sort of variation in impact likely to occur across industries and that the average impact on prices was modest. o 1984 Academic
Press, Inc.
1. INTRODUCTION
One of the major issues of recent years has been the debate over the seriousness of the impact of pollution on the environment. As a consequence of new legislation, firms and individuals have been forced to internalize certain costs that formerly had not been recognized. The internalization of these costs by business had led some individuals to argue that the burden imposed by environmental regulations is excessive. In his 1981 State of the Union address, President Reagan stated that while “we have no intention of dismantling the regulatory agencies, especially those necessary to protect the environment . . . we must come to grips with inefficient and burdensome regulations-eliminate those we can and reform the others” [9]. There have been several attempts, which utilized an input-output framework, to analyze the impact of environmental protection costs on product prices. Leontief and Ford [ll] specified a short-run input-output model to project the impact of the 1967 Clean Air Act, using four different scenarios, on price levels in the United States. Walter [30] developed a partial equilibrium input-output framework to calculate the effect of pollution abatement expenditures, using pollution abatement expenditure data for 1971, on U.S. trade. Mutti and Richardson [13,14] used Walter’s [30] data for a short-run input-output analysis, along with several more sophisticated input-output models, to investigate the impact of environmental protection costs on U.S. prices and output. Hollenbeck [lo] constructed a 17-sector model of the U.S. economy in 1973 in order to analyze the impact of pollution abatement expenditures needed to meet the standards set by the 1970 Clean Air Act Amendments. den Hartog and Houweling [7] utilized an input-output model to project the intermediate and long-run impact of pollution abatement expenditures on price levels in the Netherlands. There have been six [2-6,8] macroeconomic simulations of the impact on the U.S. economy of environmental control costs needed to meet Federal environmental regulations. These studies only investigated the aggregate impact of pollution 380 0095~0696/84 $3.00 Copyright 0 1984 by Academic Press, Inc. Au rigbt.9 of reproducticm in any form reserved
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abatement expenditures. Portney [17] discusses some of the difficulties encountered in conducting these macroeconomic simulations. In addition, there have been several studies [28] that attempted to determine the magnitude of the direct impact of environmental regulations on certain specific industries. These initial attempts to analyze the impact of environmental protection costs on prices were hampered by the sparseness of disaggregated data on pollution abatement expenditures. The data on expenditures for pollution abatement used in this study have not, heretofore, been exploited. This study is concerned with the effect of environmental protection costs on U.S. product prices in 1977. Section 2 of the paper presents the short-run input-output model that is used to analyze the impact of U.S. environmental protection costs on product prices in the United States. Section 3 discusses the empirical results and compares them with those found in previous studies on the impact of pollution abatement expenditures on U.S. product prices. Section 4 summarizes the paper and investigates some of the policy implications.
2. THE MODEL
This section specifies the partial equilibrium input-output framework that is used to analyze the short-run impact of environmental protection costs on prices. The advantage of using an input-output framework to analyze the impact of environmental protection costs is that the effects of the environmental protection costs that are passed along in the form of higher prices of intermediate goods can be observed. The following set of equations, in matrix form, specify how prices are determined using an input-output model: p = A&p + A’,q + V,
(1)
where p = n x 1 vector of domestic product prices, q = n X 1 vector of import product prices, A& = transpose of n X n domestic input-output Ah = transpose of n X n import input-output
matrix, matrix,
V = n x 1 vector of value added as a percentage of output. Solving equation (1) for p gives the following: p = [I - A&]-‘(Abq
+ V).
(2)
In the initial situation, all product prices are unitary. In this study, foreign product prices, q, are assumed to be constant because this study is concerned with the impact of environmental protection costs borne by U.S. firms. In addition, value added as a percentage of output, V, is assumed to remain constant for each industry sector. The imposition of environmental protection costs is introduced into the model as an increase in the value added coefficient of an industry. As a result, in order to
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detect the total influence of the imposition of environmental protection costs on product prices in the United States, it is necessary to modify Eq. (2) in the following manner:
p’ = [I - A&]-lE,
(3)
where p’ = n X 1 vector of the total percentage increase in product prices per unit of
output due to the imposition of environmental protection costs (measures the percentage increase in prices because p is set at unity in the initial situation), E =n X 1 vector of direct environmental protection costs (current account) per unit of output. This model assumes that supply elasticities are infinite. As a consequence, all increased costs due to environmental protection are passed along in the form of higher prices. The analysis is termed “short-run” because it does not consider the possible impact of environmental control costs on capital formation and growth. However, microeconomic theory maintains that all of the added costs incurred by producers cannot be passed on to consumers in the short run unless the price elasticity of demand is zero. All costs can be passed on in the long run, however, assuming unrestricted exit from a constant-cost industry (having a horizontal long-run supply curve). The assumption of fixed input-output coefficients, when there are changes in relative prices due to environmental protection costs, leads to imprecise results. If the value of an intermediate input is a constant proportion of the value of the output, then a change in the relative price ratio of the intermediate input and the output is likely to cause a change in the input-output coefficient. However, it would take a full general equilibrium model to determine the eventual consequences for each sector of the economy. It is also assumed that the input-output coefficients were constant from 1972 to 1977. This assumption is necessary because of the long time lag involved in publishing the input-output table. Obviously, any changes that occurred in the input-output coefficients from 1972 to 1977 will lead to inaccurate conclusions in this paper. The 1972 U.S. input-output table [18] and data on final demand in 1977 [26] are used to project sector outputs in 1977. Vaccara [29] and Bezdek and Wendling [l] discuss the procedures and problems on updating an input-output matrix. Stone [22] and the United Nations Department of Economic and Social Affairs [24] contain additional discussions of the procedures used in input-output analysis. Appendix A contains a discussion of the 1972 U.S. input-output matrix that is used in this study. The method of projecting 1977 commodity output is also discussed. The pollution abatement data used in this study are current account expenditures by U.S. firms in 1977. The data are collected by the U.S. Bureau of the Census [27]; Rutledge and Trevathan [19]; Rutledge, Dreiling and Dunlap [20]; and the National Science Foundation [15,16]. Appendix B contains a discussion of the pollution abatement data that are used in this study. Both appendixes are available from the author on request.
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The manner in which environmental control costs are entered into this framework implicitly assumes that all current account costs for pollution abatement can be considered part of the value added component of the U.S. input-output table. Tybout [23] provides an excellent survey of the various proposals and problems of incorporating pollution abatement expenditures into the national income accounts. Technically, only labor costs and depreciation incurred in abating pollution are included in the value added component. Intermediate inputs that are used in pollution abatement activities should be introduced by modifying the input-output coefficients. Lowe [12] and Steenge [21] contain the most recent discussions of how input-output tables should be modified to allow for an analysis of the impact of environmental protection costs on prices. However, the existing data are insufficient to allow for this type of analysis. It is also assumed that all other components of value added remain constant with the imposition of environmental regulations. This implicitly assumes that all resources used to abate pollution were previously unemployed. However, it is likely that some of the intermediate inputs and components of value added that are used in abating pollution were formerly used to produce conventional goods and services. As a consequence, it is likely that other components of value added will change with the imposition of environmental regulations. The next section will discuss the results generated by Eq. (3). 3. EMPIRICAL
RESULTS
This section will first present the empirical results that are obtained in this study. Then the results of this study are compared with the results obtained by previous studies. Table I lists the results obtained from the partial equilibrium approach that this study uses to forecast the impact of environmental protection costs (EPC) on U.S. product prices. Direct EPC (column 1) lists environmental protection costs as a percentage of output for each sector. This measures the direct increase in production costs. Total EPC (column 2) lists the percentage increase in prices generated by Eq. (3) that occur because environmental protection costs are borne by U.S. industry. Total EPC measures the impact of direct environmental protection costs plus the costs due to environmental protection that are passed along through the intermediate products that are used in each sector. The weighted average of Direct EPC (column 1) is 0.42% and the weighted average of Total EPC (column 2) is 0.97%. The following sectors have Direct EPC (column 1) and Total EPC (column 2) of 1.00% or greater: 1. 2. 3. 4. 5. 6.
Iron and feroalloy ores mining (I-O 5) Crude petroleum and natural gas (I-O 8) Paper and allied products, except containers (I-O 24) Chemicals and selected chemical products (I-O 27) Primary iron and steel manufacturing (I-O 37) Electric, gas, water, and sanitary services (I-O 68)
The short-run input-output model is useful in determining which sectors experience the largest total increase in costs relative to the direct costs of environmental
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TABLE I Percentage Increase in Prices with the Imposition of Environmental Protection Costs I-O
1 2 3 4 5 6
I 8 9
10 11 12 13 14 15 16 17
18 19 20 21 22 23 24 25 26 21 28 29 30 31 32 33 34 35 36 31 38 39
40 41 42 43
44 45
46 47 48 49
50 51 52 53
Input-output
sector
Livestock and livestock products Other agricultural products Forestry and fishery products Agricultural, forestry, and fishery services Iron and feroalloy ores mining Nonferrous metal ores mining Coal mining Crude petroleum and natural gas Stone and clay mining and quarrying Chemical and fertilizer mineral mining New construction Maintenance and repair construction Ordinance and accessories Food and kindred products Tobacco manufactures Broad and narrow fabrics, yarn and thread mills Miscellaneous textile goods and floor coverings Apparel Miscellaneous fabricated textile products Lumber and wood products, except containers Wood containers Household furniture Other furniture and fixtures Paper and allied products, except containers Paperboard containers and boxes Printing and publishing Chemicals and selected chemical products Plastics and synthetic materials Drugs, cleaning and toilet preparations Paints and allied products Petroleum refining and related industries Rubber and miscellaneous plastics products Leather tanning and finishing Footwear and other leather products Glass and glass products Stone and clay products Primary iron and steel manufacturing Primary nonferrous metals and manufacturing Metal containers Heating, plumbing, and structural metal products Screw machine products and stampings Other fabricated metal products Engines and turbines Farm and garden machinery Construction and mining machinery Materials handling machinery and equipment Metal working machinery and equipment Special industry machinery and equipment General industrial machinery and equipment Miscellaneous machinery, except electrical Office, computing, and accounting machines Service industry machines Electric industrial equipment and apparatus
Direct EPC
Total EPC
0.00
0.49
(4 0.00
0.44
(b) 1.94
2.67
;; 2.21
3.69
1; 0.07
0.42
(4 0.22 0.15 0.06 0.13
0.09 1.55 0.12
0.71 0.66 0.33 1.06 1.09 0.58 0.65 0.69 0.62 0.66 0.70 2.56 1.33
0.10
0.81
2.08 0.94 0.21 0.22
3.38 2.40 0.83
0.15 0.02 0.00
0.18 0.10 0.13
(4 0.19 0.56 0.05 0.26 0.68 1.29 0.73 0.21 0.09 0.13 0.19 0.26 0.19
0.18 0.07 0.07 0.13 0.14 0.13 0.08 0.17 0.16
1.46 1.02 1.30 0.64 0.95 1.55 2.35 2.00 1.34
1.00 1.01 0.93 0.96 0.85 0.83 0.71 0.57 0.72 0.77 0.71 0.47 0.80 0.77
ENVIRONMENTAL
PROTECTION
TABLE I-O 54 55 56
57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 15 76 77 78 79
Input-output
I-
385
COSTS
Conhwed
sector
Household appliances Electrical lighting and wiring equipment Radio, TV, and communication equipment Electronic components and accessories Misc. electrical machinery and supplies Motor vehicles and equipment Aircraft and parts Other transportation equipment Scientific, and controlling instruments Optical, ophthalmic, and photographic equip. Miscellaneous manufacturing Transportation and warehousing Communications, except radio and TV Radio and TV broadcasting Electric, gas, water, and sanitary services Wholesale and retail trade Finance and insurance Real estate and rental Hotels, personal and repair services excluding auto Business services Eating and drinking places Automobile repair and services Amusements Medical, education services and nonprofit org. Federal Government enterprises State and government enterprises
Direct EPC
Total EPC
0.15 0.16 0.10 0.19 0.21 0.57 0.25 0.14 0.08 0.27 0.09 0.18 (4 (4 5.00 (4 (4 0.00 (4 (4 (4 (4 0.00 0.00
0.82 0.76 0.51 0.70 0.86 1.32 0.72 0.81 0.55 0.75 0.75 0.55 6.58 0.12
0.25 0.35
Notes on Aggregukwz: (a) included in I-O 1; (b) included in I-O 3; (c) included in I-O 5; (d) included in I-O 11; (e) included in I-O 8; (f) included in I-O 68.
protection. The following sectors, which have Direct EPC (cohunn 1) greater than zero, have Total EPC (column 2) which are at least 10 times greater than Direct EPC (column 1): 1. 2. 3. 4. 5.
Apparel (I-O 18) Paperboard containers and boxes (I-O 25) Footwear and other leather products (I-O 34) Heating, plumbing, and structural metal products (I-O 40) Materials handling machinery and equipment (I-O 46)
The following sectors have Total EPC (column 2) which are no greater than twice Direct EPC (column 1): 1. 2. 3. 4.
Iron and feroalloy ores mining (I-O 5) Crude petroleum and natural gas (I-O 8) Paper and allied products, except containers (I-O 24) Chemicals and selected chemical products (I-O 27)
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CARL A. PASURKA,
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5. Primary iron and steel manufacturing (I-O 37) 6. Electric, gas, water, and sanitary services (I-O 68) These sectors experience the smallest total increase in costs relative to the direct costs incurred in meeting environmental standards. The largest Direct EPC (column 1) and Total EPC (column 2) occurs in Electric, gas, water, and sanitary services (I-O 68). Real estate and rental (I-O 71) has the smallest Total EPC (column 2) with a value of 0.12%. Motor vehicles and equipment (I-O 59) has a projected total price increase of only 1.32%; however, this study excludes that portion of pollution abatement expenditures that are borne directly by consumers. Personal consumption expenditures for pollution abatement are those current account expenditures by consumers for automobile pollution abatement. In 1977, personal consumption expenditures for pollution abatement (nondurable goods and services) were 3.17% of domestic final demand expenditures for Motor vehicles and equipment (I-O 59). It is not surprising that these sectors whose production processes generate relatively large amounts of pollutants per unit of output incur the largest direct environmental control costs per unit of output. Those sectors with the largest direct environmental control costs also have the largest total price increases. In addition, those sectors that use as intermediate inputs relatively large amounts of the output of those sectors with large direct environmental control costs experience relatively large percentage differences between total and direct environmental protection costs. Six [2-6,8] macroeconomic simulations have attempted to ascertain the impact of incremental pollution control costs (PCC) on the U.S. economy. Incremental costs are expenditures made for abating pollution that are mandated by federal environmental legislation. These costs are those that are beyond what would have been incurred in the absence of federal legislation. The U.S. Council on Environmental Quality (CEQ) [25] collected aggregate data on the difference between incremental and total pollution abatement expenditures in 1977. The data on pollution abatement expenditures consists of operation costs, maintenance costs, and capital costs (interest plus depreciation). Total pollution abatement expenditures in the U.S. economy were $39.9 billion, of which $19.3 billion were incremental costs. This includes public and private expenditures for abating the following types of pollution: (1) radiation, (2) air, (3) solid waste, (4) water, (5) land reclamation, (6) toxic substances, and (7) noise. Total pollution abatement expenditures by private industry in 1977 for air, water, and solid waste abatement were $19.2 billion, of which $11.5 billion were classified as incremental costs. Among the items calculated by the macroeconomic simulations was the growth rate of the consumer price index. Table II lists the percentage difference ,in ‘the growth rate of the consumer price index (CPI) in 1977 between the simulation with pollution control costs and the simulation without pollution control costs. The two studies conducted by Data Resources [5,6] are the only macroeconomic simulations using historical data for 1977. The data used in this study consists of total pollution abatement expenditures to eliminate air, water, and solid waste pollution. Since incremental costs are slightly greater than one-half of total costs, the aggregate results of this study seem reasonably close to those obtained by Data Resources [5,6]. Only the Chase Econometrics study in 1976 [4] projected that pollution -control costs would have a larger impact on prices than the results presented here.’
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COSTS
TABLE II Macroeconomic Simulations of Growth Rate of CPI for 1977, with or without Pollution Control Costs
Chase Econometrics [2] Evans [ 81 Chase Econometrics [3] Chase Econometrics [4] Data Resources [5,6]
Without PCC (W)
With PCC (S)
Differences (W)
4.17 3.37 6.0 7.2 6.2
3.80 3.42 6.4 8.3 6.5
-0.37 0.05 0.4 1.1 0.3
Hollenbeck [lOI found that although there were great variations among sectors, the consumer price index rose by only 0.02% and 0.35% in two separate simulations. These aggregate results are lower than the result of my study because Hollenbeck [lo] was investigating the impact of expenditures to abate only air pollution in 1973. Public utilities exhibited the greatest price increases of 2.58 and 7.00%. Primary steel and iron manufacturing experienced price increases of 0.38 and 1.91%. My results show a 6.58% price increase for Electric, gas, water, and sanitary services (I-O 68) and a 2.35% price increase for Primary iron and steel manufacturing (I-O 37). Hollenbeck also found that the following sectors experienced price declines: (1) Paper and allied products and (2) Chemicals and plastics. These prices were lower because a decline in unit labor costs offset the increased capital costs caused by environmental regulations. My results indicate that both of those sectors are among the six sectors experiencing the largest price increases. Mutti and Richardson [13] calculated the percentage increases in prices because of environmental protection costs utilizing six different simulations. Each simulation represented a different financing scheme and assumption about domestic supply elasticities. The aggregate change in prices was obtained by weighting the industry price changes by their output shares of precontrol total output. The weighted aggregate results of the six different simulations are shown in Table III. The polluter pays model with infinite domestic elasticities of supply is identical to the model specified in this paper. The average price increase of 1.75% found by Mutti and Richardson is higher than the average price increase of 0.97% found here. The difference in surprising because pollution abatement .expenditures were increasing throughout the 1970’s. Part of the difference exists because the pollution abatement expenditure data utilized by Mutti and Richardson included a measure of the opportunity cost of the capital stock used for pollution abatement. Because of the lack of information about the capital stock for pollution abatement, I did not attempt to estimate this factor. Mutti and Richardson [13] found that the following sectors had the largest percentage increases in prices: 1. 2. 3. 4. 5. 6.
Plastics and synthetic materials (I-O 28) : 4.18% Paints and allied products (I-O 30) : 5.12% Petroleum refining and related industries (I-O 31) : 4.78% Scientific and controlling instruments (I-O 62) : 4.54% Optical, ophthalmic and photographical equipment (I-O 63) : 4.31% Electric, gas, water, and sanitary services (I-O 68) : 5.37%
388
CARL A. PASURKA,
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All k’s = 00 d’s 5 cm
JR.
TABLE III Results: Aggregate Percentage Price Increases Polluter pays
Value added tax
1.75 1.26
1.51 1.26
Production tax 1.52 1.25
Note: E’‘s = Domestic supply elasticities.
In addition to projecting a larger aggregate price increase than my paper does, the Mutti and Richardson results yielded different sectors that had the largest price increases. Of the six sectors found to have the largest price increases in my study, only the following two were among the six sectors with the largest price increases in the Mutti and Richardson study: (1) Crude petroleum and natural gas (I-O 8) includes Petroleum refining and related industries (I-O 31), and (2) Electric, gas, water, and sanitary services (I-O 68). There have been several microeconomic simulations conducted for the Environmental Protection Agency [28]. A study of the copper industry predicted a 5.3% increase in copper prices in 1977 due to environmental regulations. The results reported here show a 2.00% price increase for Primary nonferous metals manufacturing (I-O 38). A study of the paper industry predicted that prices would be 6% higher due to environmental protection costs in 1983 compared to 1975. The present results indicate that Paper and allied products, except containers (I-O 24) had a 2.56% price increase; and Paperboard containers and boxes (I-O 25) experiences a 1.33% price increase. A study of the electric power industry predicted a 6.7% price increase between 1975 and 1983 because of environmental control costs. The results presented here indicate that the price increase associated with pollution abatement expenditures by Electric, gas, water, and sanitary services (I-O 68) was 6.58%. Finally, a study of the steel industry predicted that prices in 1983 would be 4.6% higher than in 1975 due to environmental regulations. The estimates in this study indicate a price increase in Primary iron and steel manufacturing (I-O 37) of 2.35%. The previous empirical studies utilized a variety of methodologies to analyze the impact of pollution abatement expenditures on prices in the United States. The price increases I found were substantially lower than those found when separate industries were analyzed. However, with the possible exception of the Mutti and Richardson results, the projected price increases yielded by this study are of approximately the same magnitude as those found by the remaining previous studies. 4. CONCLUSION
The interpretation of the results must be tempered by the knowledge that certain assumptions were made in conducting the input-output analysis. The assumption of fixed input-output coefficients has distorted the results; however, it is difficult to determine the extent and direction of this impact. The use of the simple input-output framework assumes that all environmental control costs incurred by firms are passing along in the form of higher prices. This study ignores the impact of pollution
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abatement expenditures on capital formation and growth. It also ignores the benefits of improved environmental quality that come about as a results of environmental regulations. The purpose of this paper was to investigate the magnitude of the increase in U.S. product prices that accompanied the imposition of environmental protection costs in 1977. It was found that the total price increases ranged from 0.12% for Real estate and rental (I-O 71) to 6.58% for Electric, gas, water and sanitary services (I-O 68). The average weighted price increase was found to be 0.97%. The results of this study indicate that for most industry sectors in the United States, environmental protection costs did not result in significant price increases in 1977. It is unlikely that a significant amount of the inflation experienced by the United States in recent years was caused by the costs of meeting environmental regulations. In addition, it is unlikely that the increased costs experienced by U.S. firms put them at a competitive disadvantage in world markets. This is especially true now that other nations have begun to implement their own environmental regulations. The one impact of pollution abatement expenditures that is beyond dispute is that they have caused changes in the relative prices among industry sectors in the economy. ACKNOWLEDGMENTS This paper is based upon a portion of my Ph.D. dissertation at the University of Illinois at Urbana-Champaign. I wish to thank the members of my dissertation committee, Robert W. Gillespie, George Judge, and Marvin Frankel, for their helpful suggestions. The author also wishes to thank two anonymous referees for their helpful suggestions. Of course, any remaining errors are my sole responsibility.
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