The effect of sulfur regulations on the U.S. electric power industry: a generalized cost approach

Abstract

This paper estimates the effects of sulfur dioxide emission regulations on the US electric power industry during the 1975–1990 period by utilizing a generalized cost function along with shadow input prices. In the presence of various regulations, including those intended to control sulfur dioxide emissions, firms will likely fail to minimize production costs. The null hypothesis of cost minimization is rejected, implying that the use of a neoclassical cost function is inappropriate for this study. A comparison of the results obtained by estimating a generalized cost function and those obtained with a neoclassical cost function reveals that the use of a neoclassical restriction brings an underestimation of the average percentage increase in cost by 1.1 percentage points.