Essays in Industrial Organization, Growth, and the Environment

Abstract

This dissertation consists of three essays which examine the effects of government intervention into the economy and the resulting effects on the environment and on growth. These essays use natural variation in observed behaviors and outcomes to gauge the impact of government action using either a reduced form or structural model. The first essay measures the environmental benefits of renewable energy subsidies. Production subsidies for renewable energy have been a popular program due to their perceived environmental benefits. Wind energy in particular has taken advantage of federal subsidies. However, little empirical research has been conducted which would quantify such benefits. Taking investment in wind capacity as given, I am able to identify the short run substitution patterns between wind power and conventional power for large electricity grid in Texas. I exploit the randomness of wind to identify plant level substitution of wind generated electricity for conventionally generated electricity. I then quantify the avoided emissions and associated costs using plant level emissions information, market clearing prices for pollution permits, and estimates of the social costs of pollution. The end result is the value of avoided emissions due to government subsidies. I find that the value of subsidies hinges on the value placed on reducing carbon dioxide emissions. The second essay assess the effectiveness of potential environmental regulations to reduce carbon dioxide emissions from the electricity producers. Climate change, driven by rising carbon dioxide (CO₂) levels, has become one of the most pressing economic and political issues. Governments around the world are implementing environmental regulations that tax or price carbon dioxide emissions or significantly increase renewable energy production. Electricity producers are the leading emitters of CO₂ and other pollutants. They make their output decisions in response to fluctuating prices for electricity given their costs of production, which include substantial startup costs. In this essay I recover the cost parameters of the industry with a dynamic price taking model. The parameters are used to solve for equilibrium prices and to simulate the supply of electricity, consumer surplus and firm profits under counterfactual environmental policies. Preliminary results evaluating a carbon tax policy show that total emissions from the industry do not change significantly when faced with tax rates at the levels currently under consideration by legislators. Even a very large carbon tax of ten times that of expected levels lowers emissions by only 9% in the short run. The third essay, co-authored with Dr. Price Fishback, examines the growth of local economies which were the target of large government expenditures. Studies of the development of local economies often point to large-scale World War II military spending as a source of long-term economic growth, even though the spending declined sharply after the demobilization. We examine the longer term impact of the temporary war spending on county economies using a variety of measures of socioeconomic activity: including per capita retail sales, the extent of manufacturing, population growth, the share of women in the work force, housing values and ownership, and per capita savings over the period 1940-1950. We find that in the longer term counties receiving more war spending per capita during the war experienced extensive growth due to increases in population but not intensive growth, as the war spending had very small impacts on per capita measures of economic activity.