|Furthermore, the regulatory action may displace workers
from jobs through its impacts on levels of production. The
methodology employed to estimate the number of displaced workers
depends on the methodology used to project output effects (individual
facility or aggregate market response). If facility output
decisions are modeled, then changes in employment at facilities
that continue to operate after regulation are estimated by multiplying
a facility-specific ratio of production workers per output (i.e., e)
by the projected change in the facilitys production (i.e., q).
If the facility ceases to operate, then the change in employment
at the mill equals total employment, both production and nonproduction
workers (i.e., E). Thus, the estimate of the change in employment
for the entire industry can be obtained by adding the sum of the
employment changes across all facilities that continue to operate
and the sum of total employment across all facilities that close.
This produces a net estimate that aggregates the job losses
at facilities that close or reduce production and job gains at
facilities that increase production. Therefore, to estimate
only employee displacement, or job losses, the analyst may sum
the projected change in employment for those facilities that
close or reduce their production level. Alternatively,
if only market responses are modeled, then only a net
measure of employment change may be computed by multiplying
an industry-specific ratio of employment per output by
the projected change in aggregate industry production.
| 5.4.3 Company-Level
|A regulatory action to reduce air emissions from particular facilities will potentially affect the business entities that own the regulated facilities. Companies or individuals that own the facilities are legal business entities that have the capacity to conduct business transactions and make business decisions that affect the operations at the facility. The legal and financial responsibility for compliance with a regulatory action rests with these owners who must ultimately bear the financial consequences of their decisions. The owners response options to a proposed regulatory action potentially include the following:
Owners are assumed to pursue the course of action that maximizes the value of
the firm, subject, of course, to uncertainties about actual costs of compliance
and the behavior of other companies. The market approach presented
in this section addresses the first two response options listed above.
As mentioned in the introduction to Section 5, the facility and
market impacts should feed into the financial analysis to assess the financial
viability of the owning companies (i.e., company-level impacts). In
other words, the analyst must identify which companies are likely to have
problems meeting their debt obligations in the face of regulation and
be required to liquidate facility assets under option three above. In
addition, this type of analysis addresses distributional issues across
these companies with special concern for disparate impacts on small businesses.
- implement the cost-minimizing compliance option and continue
to operate the facility,
- close the facility voluntarily, or
- close the facility involuntarily.
The financial analysis evaluates the change in firm health by computing
the with- regulation financial ratios of potentially affected firms and
comparing them to the corresponding baseline ratios or industry-specific
standards. These financial ratios may include indicators of liquidity,
asset management, debt management, and profitability. Although a
variety of possible financial ratios provide individual indicators of
a firms health, they most often do not give the same signals. Therefore,
the company-level analysis should focus only on changes in key measures
of profitability, that is,
As a result of a proposed regulation, owners will potentially experience changes
in profits associated with changes in the costs and revenues of their
manufacturing operations. Net changes in profitability may be derived
by summing facility cost and revenue changes across all facilities owned
by each affected company. The net impact on a companys profitability
may be negative (i.e., cost increases exceed revenue increases) or positive
(i.e., revenue increases exceed cost increases). In most cases,
there is little reason to go beyond the assessment of changes in profitability.
Although issues of capital availability are important to address,
especially in regard to small businesses, they are often difficult to
assess accurately and may provide little more information beyond the assessment
of firm profitability.
- return on sales, which is computed as net income divided by
- return on assets, which is computed as net income divided
by total assets; and
- return on equity, which is computed as net income divided
by owners equity, or net worth.
Based on the facility- and industry-level impacts, community or region-specific
impacts of a proposed regulatory action can be computed for employment
and tax revenues. Changes in employment and tax revenues are linked
to the projected change in production and profits at affected and unaffected
producers located in the geographic areas of interest (i.e., counties,
states, or regions). Computing the community impacts involves aggregating
the facility-specific changes for each measure of interest.
Costs of the Regulation
As stipulated in E.O. 12866, when a proposed regulatory action is deemed
significant, an estimate of a regulations social cost
is compared with an estimate of social benefits to determine whether the
benefits justify the costs. Toward that end, the social cost of
a regulation should represent its opportunity cost ( OMB, 1996,
p. 32), which is the value of the goods and services that society foregoes
to allocate resources to the pollution control activity.
The analyst considers three types of social cost in conducting EIAs:
The first category reflects the opportunity cost of the resources applied to compliance
activities. When regulation takes the form of mandated private actions,
the opportunity cost of these actions ideally is captured in measures
of producer and consumer surplus from the markets affected by the regulation.
These surplus measures can be directly computed from the market-based
approach presented in this section and typically account for the majority
of the total cost of a regulatory action. Thus, this estimate is
most often presented in the EIA as the social cost of regulation., The
methodology for computing these measures is presented below. When
lack of market data and model parameters impedes the computation of producer
and consumer surplus measures, engineering or accounting methods must
be used to approximate social costs.
- the costs of actions taken to comply with the regulation,
- the costs of administering and enforcing the regulation, and
- the costs associated with economic impacts.
However, other components of social cost may not be fully accounted for
in the compliance cost estimates and, thus, not reflected in the partial
equilibrium framework. These other components of social costs include
government monitoring and enforcement costs and the costs associated with
economic impacts such as involuntary unemployment, plant closings, and
changes in innovation. In these cases, other valuation approaches
must be used to separately examine and measure these other cost components.
and Consumer Surplus Measures
The value of a regulatory action is traditionally measured by the change
in economic welfare that it generates. Welfare impacts resulting
from a proposed regulatory action on the U.S. society will extend
to the many consumers and producers of affected commodities. Consumers
will experience welfare impacts due to the adjustments in market prices
and consumption levels that result from imposition of the regulation.
Producer welfare impacts result from the changes in product revenues
to all producers associated with the imposition of the rule and the corresponding
changes in production and market prices. Based on applied welfare
economics principles, Table 5-6 presents an example of the estimates of
the social costs and their distribution by stakeholder from the EIA conducted
in support of the Polymers and Resins III NESHAP.
The economic welfare implications of the market price and output changes
associated with a proposed regulatory action can be examined using changes
in the net benefits of consumers and producers. Figure 5-14 depicts
this approach to estimating social costs by first measuring the change
in consumer surplus and then the change in producer surplus. In
essence, the demand and supply curves previously described as predictive
devices are now being used as a valuation tool. This method of estimating
the social costs of the regulation decomposes society into consumers and
producers. In a market environment, consumers and producers of the
good or service derive welfare from a market transaction. The difference
between the maximum price consumers are willing to pay for a good and
the price they actually pay is referred to as consumer surplus.
Consumer surplus is measured as the area under the demand
curve and above the price of the product. Similarly, the difference
between the minimum price producers are willing to accept for a good and
the price they actually receive is referred to as producer surplus.
Producer surplus is measured as the area above