The Impact of Environmental Regulation on Business Behavior: A Case Study of the Pulp and Paper Industry in Kalamazoo County, Michigan
The pollution laden pulp and paper industry dominated Kalamazoo County's economy during the twentieth century. The industrial district was positioned around the Kalamazoo River, which quickly became an open sewer for paper and pulp wastes. In the 1950's environmental action began in Kalamazoo, gaining momentum in the 1970's with the national movement, creating the Environmental Protection Agency (EPA). The resistance and persistent protests of the Kalamazoo businesses against the environmental initiatives suggest that environmental regulation was a significant factor in driving the pulp and paper industry from Kalamazoo County. Theory of environmental externalities is a core interaction between industries and the environment, this paper outlines that theory and the different types of regulation proposed to solve the problems such as lack of ownership, exclusion, and accountability. Additionally the impacts of each method of regulation is reviewed theoretically as well as through a discussion of empirical evidence. The pulp and paper industry of Kalamazoo County, MI reflects on a micro level, the transitions businesses faced throughout the United States during the peak of environmental initiatives, 1970-1997. Local business patterns and pulp and paper mill data of Kalamazoo County once gathered, is able to model using a Cobb-Douglas production function the impact of environmental regulation on the decreasing output and ultimate collapse of the industry. The overall business environment of Kalamazoo County, contrary to normal expectations, suggest that costs associated with reducing pollution positively impact output. From historical sources a lack of capital investment and limited growth possibilities appear to have been greater forces in the collapse of the industry. While these results are not consistent with nation wide industry expectations, they are consistent with previous empirical work on the pulp and paper industry. Unique to this industry is that environmental technology is symbiotic with the process of paper production, enhancing the quality and volume of output. Applying the case study of Kalamazoo County to other industries facing increased pollution regulation, suggests that the relationship between output and technology is critical.
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