The economics of environmental permitting

This thesis examines the use of environmental licensing as a policy tool for regulating economic activities with spatially heterogeneous environmental damages. Environmental licenses are a policy tool that can be effectively used to target regulation by location and incorporate active learning about potentially irreversible environmental damages through environmental assessments.; Following a comprehensive literature review in Chapter 2, Chapter 3 examines the optimal level of environmental assessment for a development project at a single site. A pre-project assessment can lead to better, though not perfectly, targeted regulation, but it incurs costs. The optimal assessment balances the benefits of better-targeted regulation with the costs and is derived analytically. Because information is costly, an optimal assessment will not obtain complete information on potential damages and regulation will generally not be perfectly targeted. This work augments existing work in the environmental economics literature by removing the less realistic assumption that assessment results in perfect revelation of potential damages.; Chapters 4 and 5 explore the regional implications of development decisions under various environmental regulatory scenarios in a conceptual framework. Chapter 4 introduces the regional model used in subsequent chapters by focusing on the simplest case, development in the absence of regulation. The regional model extends the single parcel model introduced in Chapter 3 to one with many parcels, each differing in environmental sensitivity and residential desirability and incorporates key market features. I simulate the regional land development patterns. The results show that without having to consider the environmental consequences of development, developers build at the same density on sites of equal residential appeal leading to a suboptimal housing market equilibrium.; Chapter 5 builds on this regional model to include different types of land-use regulation. These include non-differentiated policy tools such as a uniform tax on housing density and protected area zoning as well as differentiated tools such as Pigouvian taxes and a tax/subsidy scheme used jointly so that development activities on some parcels are subsidized. I simulate the development patterns for each case and find that different regulations have markedly different effects on regional outcomes such as housing prices, the aggregate supply of housing and overall development patterns. The results also suggest it is generally better to target regulation by location.; Chapter 6 examines the implications of selectively requiring proposed development projects to undergo an environmental assessment based on their characteristics. I examine the welfare implications of various rules that govern which projects will be assessed. Proposed projects may be selectively chosen to undergo environmental assessment based on (1) the density of the project, (2) prior beliefs about environmental sensitivity, or (3) whether both density and beliefs about environmental sensitivity exceed minimum thresholds. I develop decision rules for the optimal cutoff. I show that cutoff choices greatly influence developers' decisions about proposed density and development location, as these decisions adjust to avoid anticipated assessment costs. Thus, assessment rules are shown to have both direct and indirect effects on development decisions. The regional frameworks developed in Chapters 4, 5, and 6 allow for an examination of the regulatory impacts of regulation in a more general equilibrium framework and explores which parcels and landowners stand to gain or lose under different regulatory scenarios.