The market responses to the government regulation of chlorinated solvents: a policy analysis

by Thomas W. Chesnutt

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Under the Toxic Substances Control Act, the Environmental Protection Agency must oversee a wide range of chemicals that may harm people or the environment. Because users of a chemical can substitute other chemicals, regulatory analysis must account for the second-order effects of regulation on the other chemicals. This paper argues that implicit tradeoffs among chemicals occur repeatedly as the response of economic markets to government regulation. For this reason, it recommends that such tradeoffs be formally incorporated into the analysis of regulatory alternatives. Using publicly available historical data on chemical markets, the study builds a methodology to formally handle economic interrelationships among chemicals. The case of markets for one set of functionally related chemicals--solvents containing chlorine--demonstrates the construction and application of an empirical model of related markets. The empirical model first measures the underlying economic forces in order to document the later effect of government regulation. The magnitude of government regulation is then modeled and measured. Finally, the model of interrelated markets is used to demonstrate the system-wide effects of regulation on one or more chemicals.

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