Environmental Regulation Cost and Industry Structure Changes

Nonstationary Markov analyses are used to investigate impacts of environmental regulatory costs associated with compliance on changes in market structure in pulp and paper industries. Results show environmental regulation expenditures have statistically significant effects on the probabilities of capacity moving to a larger company-size category, so industry structure is affected by environmental regulation. However, counter to expectations, results further show consolidation occurs with higher probability when environmental costs are falling rather than when they are rising. Policy analyses that presume immediate policy responses to cost changes or that industry structure is unchanged may yield time-inconsistent policy conclusions.