The effect of environmental regulations: a restricted cost function for Korean manufacturing industries

Environmental conservation requires society to consider the trade-off between allocating resources to productive activities and pollution control activities. Therefore, it is informative to measure the effect of environmental regulations on firms' productivity. This paper attempts to estimate the impact of environmental regulations on Korean manufacturing industries. Despite being key inputs in the manufacturing process, raw materials have often been excluded from the cost function due to the lack of price data. A restricted cost function is used to improve the reliability of parameter estimates. Empirical results indicate that environmental regulations caused a 12 percent decline in the average annual rate of productivity growth over the period 1982–93.