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Formal and Informal Regulation of Industrial Pollution: Comparative Evidence from Indonesia and the U.S." World Bank Policy Research Working Paper

By Sheoli Pargal, Hemamala Hettige, Manjula Singh and David Wheeler


Economic theory and recent empirical work suggest that when formal regulation of pollution is absent or less than 100 percent effective, affected communities are often able to negotiate abatement from plants in their vicinity through “informal regulation.” Using a model of equilibrium pollution, this article confirms the existence of significant informal regulation for unregulated pollutants in both Indonesia and the United States as well as for regulated pollutants in the United States. Combining plant-level data with community data in both countries, regressions reveal that even after controlling for traditional economic variables such as output levels and input prices as well as for plant characteristics such as industrial sector and age, the per capita income of affected communities significantly affects pollution intensities. Higher-income communities win significantly lower emissions in both countries and for both unregulated and regulated pollutants in the United States, presumably because income affects both preferences for environmental quality and the ability to bring pressure on polluting factories. This article starts from the premise that governments, using the various instruments at their disposal, act as agents of the public in regulating pollution. However, when formal regulatory mechanisms are absent or ineffective, communities seek other means of translating their preferences into reality. Recent empirical work indicates the widespread existence of such “informal ” regulation through which communities are often able to negotiate with or informally pressure polluting plants in their vicinity to clean up. Formal regulatory mechanisms include both command and control instruments (effluent concentration standards, technology standards) and market-based instruments (emissions charges, abatement credits, tradable permits). Informal regulation also takes many forms, including demands for compensation by Sheoli Pargal, Hemamala Hettige, and David Wheeler are with the Development Research Group at the World Bank. Manjula Singh is with AT&T and was formerly a consultant at the World Bank

Year: 1996
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