Formal and Informal Regulation of Industrial Pollution: Comparative Evidence from Indonesia and the United States

The authors start from the premise that governments act as agents of the public in regulating pollution, using the instruments at their disposal. But when formal regulatory mechanisms are absent or ineffective, communities will seek other means of translating their preferences into reality. Recent empirical work suggests the widespread existence of such informal regulation: communities are often able to negotiate with or otherwise informally pressure polluting plants in their vicinity to clean up. Their thesis is that such informal regulation is likely wherever formal regulation leaves a gap between actual and locally preferred environmental quality. They use plant-level data from Indonesia and the United States -two countries that are very different, both socio-economically and in terms of pollution regulation- to test a model of equilibrium pollution under informal regulation. Their results suggest three common elements across countries and pollutants: abatement is generally subject to significant scale economies; within-country variations in labor and energy prices have little impact on pollution intensity; community incomes have a powerful negative association with pollution intensity. Their findings on community income are especially important, as they suggest a powerful role for informal regulation whether or not formal regulation is in place. The impact of income disparity on inter-county differences in U.S. pollution intensities seems to match the impact in Indonesia. Undoubtedly, this reflects differences in both preference for environmental quality and ability to bring pressure on polluting factories. The fact that such disparities exist in the United States, even for traditionally regulated pollutants, shows that U.S. regulation has not been able to ensure uniform environmental quality for all citizens regardless of income class.