Short and Long Term Cost Consequences of Government Regulations to Consumers

Rachel Dardis, University of Maryland
ABSTRACT - Government regulations in the area of textiles are categorized according to whether they are designed to protect the worker, the environment or the consumer. In most instances regulations will entail an increase in manufacturing costs which will be passed on to consumers in the long run. However, the existence of imports may serve to depress price increases in the case of regulations affecting the worker or the environment.
[ to cite ]:
Rachel Dardis (1978) ,"Short and Long Term Cost Consequences of Government Regulations to Consumers", in NA - Advances in Consumer Research Volume 05, eds. Kent Hunt, Ann Abor, MI : Association for Consumer Research, Pages: 377-379.

Advances in Consumer Research Volume 5, 1978      Pages 377-379

SHORT AND LONG TERM COST CONSEQUENCES OF GOVERNMENT REGULATIONS TO CONSUMERS

Rachel Dardis, University of Maryland

ABSTRACT -

Government regulations in the area of textiles are categorized according to whether they are designed to protect the worker, the environment or the consumer. In most instances regulations will entail an increase in manufacturing costs which will be passed on to consumers in the long run. However, the existence of imports may serve to depress price increases in the case of regulations affecting the worker or the environment.

INTRODUCTION

It is not possible in this paper to cover all government regulations affecting the textile industry. However, most government regulations may be classified under three major headings: (a) regulations to protect the textile worker, (b) regulations to protect the environment, and (c) regulations to protect the consumer. Major regulations in each of these areas will first be discussed while the impact of such regulations on the industry and the consumer will be discussed in the second section of the paper.

REGULATIONS TO PROTECT THE TEXTILE WORKER

Two major regulations address the exposure of the worker to cotton dust and noise. Cotton dust is believed to cause byssinosis though the specific agent in cotton dust has not yet been identified. The current OSHA regulations for cotton dust exposure are set at 1 mg/M3 of total dust (ATMI, 1975). The standard also requires that administrative or engineering controls to reduce cotton dust be implemented where feasible. If such controls are not feasible then respirators or other protection equipment must be worn by the worker. OSHA has proposed a new standard for cotton dust of 0.2 mg/M3 of total dust (Textile World, 1977). Estimated costs of meeting the standards, assuming that equipment could be developed, include initial capital expenditures of at least $860 million, and annual energy and maintenance costs of $35 million and $4 million respectively (ATMI, 1975; Textile World, 1977). The feasibility of the proposed standard was also challenged by a cotton-dust expert at a recent hearing. Hocutt claimed that "anything under 0.5 would shut down spinning; anything under 1.0, weaving" (Textile World, 1977, p. 23).

Noise regulations affect most industries including the textile industry. However, they have a significant impact on the textile industry in view of the fact that textile processing is characterized by relatively high levels of noise. The present OSHA regulations specify that employees shall not be exposed to noise in excess of 90 dBA for an eight hour time period (ATMI, 1975). If noise levels are exceeded then engineering controls must be implemented or protective devices such as ear plugs and muffs must be worn by the worker. However, protective equipment is viewed as a temporary device by OSHA since there is no guarantee that it will be used by the worker. Recently the EPA has proposed an 85 dBA standard which would entail even greater costs for the textile industry. A study by OSHA estimated that it would cost $1.1 billion to meet the present 90 dBA level and $2.7 billion to meet the 85 dBA level (Storey, 1976).

REGULATIONS TO PROTECT THE ENVIRONMENT

A major regulation in this area pertains to water pollution. Regulations for controlling the discharges of pollutants by the textile industry were promulgated in February 1974 (ATMI 1975). Two levels of abatement were proposed with the lower level recommended for 1977 and the higher level for 1983. According to industry spokesmen there are few problems in meeting the 1977 level (ATMI, 1975). However, the feasibility of meeting the 1983 level has been debated. Estimated costs to the textile industry in achieving the 1977 and 1983 levels were estimated by the National Commission on Water Quality as follows:

    ($ million)                                         1977          1983           Total

Capital required                                 384-780     526-785    910-1,565

Annual Operation & Maintenance         49-68         50-81

REGULATIONS TO PROTECT THE CONSUMER

The Consumer Product Safety Commission began operation in 1973 after passage of the Consumer Product Safety Act. Four major areas of enforcement are (a) clothing textiles, (b) carpets and rugs, (c) children's sleepwear, and (d) mattresses (Lyons, 1976). Standards have also been proposed for upholstered fabrics and furniture and for wearing apparel.

Studies of the existing children's sleepwear standards concluded that they would increase consumer costs by approximately 30% (Dardis, 1977). However, the standards were also cost effective in view of the number of flammable fabric incidents involving children's sleepwear. Extension of existing sleepwear standards to children's clothing resulted in unfavorable cost-benefit ratios even under the most favorable assumption that the standards would entail no reduction in consumer choice. Cost-benefit analysis has not been applied to either of the two proposed standards. The proposed upholstery standard is estimated to result in a 10% to 30% price increase at retail as well as the elimination of certain fabrics (Storey, 1976). The proposed general wearing apparel standard combines flammability characteristics of textiles with garment style and is designed to reduce flammability treatment costs since tight fitting garments have less severe fabric flammability requirements. However, this standard may also entail a certain reduction in consumer choice since certain fabric/garment combinations will be eliminated. Testing and record keeping requirements for manufacturers will also entail costs.

IMPACT ON CONSUMERS

Impact on U. S. Textile Industry

In assessing the impact of government regulations on the consumer it is first necessary to take into consideration the impact of such regulations on the textile industry. The textile industry is characterized by perfect competition or monopolistic competition, both of which are competitive market structures. In addition the industry faces competition from imports from low wage countries such as Korea, Taiwan and more recently Red China.

Recognition of the textile industry's vulnerability to imports and the need for maintaining a viable domestic industry has led to trade regulations to control the flow of imports into the U. S. The most recent agreement was the MultiFiber Agreement (MFA) which is due to expire at the end of 1977. In spite of this agreement imports continue to present a problem and there has been increased awareness of the necessity for modernization in order to meet competition from other countries. However, the textile industry's ability to modernize may be constrained by the diversion of funds from productive investment to investment to meet government regulations in the area of worker or environmental protection. According to Storey "for the abatement of cotton dust, noise and water pollution, there is a capital requirement equal to five years of the industry's earnings and equal to five years of its average annual investment in new plant and equipment" (Storey, 1976, p. 20). In addition operating and maintenance costs of meeting government regulations in these areas will reduce after tax profits of the industry and hence its earnings for capital expenditures. The reduction in productive investment by the textile industry will mean higher prices for the consumer in the long run.

Short-Term Cost Consequences to Consumers

The impact of government regulations on consumers is illustrated in Figure 1.

FIGURE 1

COST OF GOVERNMENT REGULATION

In the initial pre-regulation situation the domestic demand and supply curves are given by Sd and Dd respectively while the world supply curve is given by Sw. A market price and quantity of P , Q is obtained with domestic production accounting for OQ3 units and imports accounting for Q3Q1 units. Imposition of a governmental regulation will increase manufacturing costs by P2P1 corresponding to a shift in the supply curve from Sd to Sd'. The world supply curve S may shift or remain constant depending on the nature of the regulations and the policies of exporting countries.

In the case of flammability standards, such standards must also be met by foreign manufacturers. Assuming foreign manufacturers face similar cost increases to those met by domestic manufacturers then Sw will shift to Sw'. The new equilibrium price and quantity is P2, Q2. The cost to the consumer is given by the shaded area P2P112 which represents the change in consumer surplus due to the price increase (Dardis, 1977).

In the case of worker or environmental regulations there is no change in the world supply curve unless exporting countries adopt similar regulations. This is unlikely since most textile exporting countries are underdeveloped countries with a need for trade and foreign capital which can only be obtained if they maintain their competitive position in the world market. The impact of government regulation (other than flammability standards) is shown in Figure 2.

FIGURE 2

COST OF GOVERNMENT REGULATION

The initial equilibrium situation of P1, Q1 is identical to that show in Figure 1. Imposition of a regulation results in a shift of the supply curve from Sd to Sd' while S remains unchanged. Two situations are now possible. Win the first instance imports expand to meet consumer demand increasing from Q3Q1 to Q5Q1 while domestic production declines from OQ3 to OQ5. This situation is unlikely, however, since the flow of imports is controlled by trade regulations. In the event that trade regulations are continued, imports are maintained at their former level (Q3Q1) while domestic production declines from OQ3 to OQ4. The final equilibrium price and quantity is given by P2, Q2 and the cost to the consumer from the price increase is given by the shaded area, P2P112.

A comparison of Figures l and 2 indicates some interesting differences in the impact of government regulations on the consumer. While most regulations will entail a cost increase for manufacturers the degree to which the cost increase is passed on to the consumer depends on the particular regulation. In the case of flammability standards both foreign and domestic manufacturers must meet the standard so that the consumer will pay the full cost increase. In some instances the foreign manufacturer may refrain from exporting to the U. S. in view of the availability of other markets and the cost of operating two production lines. In this case the equilibrium price and quantity after the passage of a flammability standard is given by the intersection of the domestic demand and supply curves (Sd' and Dd). Consumer protection, which discourages imports, also ensures producer protection. In contrast to this result, other regulations place the domestic manufacturer at a competitive disadvantage since they cannot be imposed on foreign manufacturers. Unless trade regulations are in effect the domestic industry will suffer disruption. Even with trade regulations the availability of imports means that the full cost increase is unlikely to be passed on to the consumer. Thus the price increase in Figure 2 is less than the cost increase.

Long-Term Cost Consequences to Consumers

Such costs are more difficult to project. Possible long-term cost consequences include the following:

(a) exit of firms in the domestic textile industry with a consequent reduction in competition,

(b) change from cotton textile production to man-made textile production due to uncertainty about cotton dust standards and flammability standards, which would mean a significant reduction in consumer choice, and

(c) increased energy requirements by the industry to meet government regulations and a reduction in the supply of energy available to consumers.

CONCLUSION

As mentioned earlier only a selected number of government regulations could be reviewed in this paper. In particular the impact of the Toxic Substances Control Act was not discussed. It is obvious, however, that the textile industry has faced and will continue to face numerous regulations which are promulgated and enforced by many different government agencies. Several conclusions may be drawn from a review of existing regulations:

(a) Regulations are needed to protect the worker, the environment, and the consumer. Thus in the absence of regulations (or other measures such as taxes) there is no incentive for the individual firm to control dust or noise levels or water pollution since such controls would increase manufacturing costs and place the firm at a competitive disadvantage.

(b) Prior to the imposition of the regulations the textile products consumer was not paying the true cost of production. The firm's costs reflected the private costs of production but did not in-clued the social costs of worker ill-health or environmental pollution.

(c) The implementation of regulations means in most instances an increase in manufacturing costs and such costs will eventually be born by the consumer.

(d) Flammability standards differ from other regulations since the potential beneficiary also incurs the costs. The more specific the regulation, i.e. addressed to certain high risk groups, the greater the correspondence between costs and benefits.

(e) Much of the current debate concerns the degree of protection which should be required and the necessity for equating costs and benefits from regulations. Thus in the case of water pollution the 1985 goal of zero discharge is increasingly being questioned on the basis of incremental costs and benefits.

(f) The increase in the number of government regulations affecting the textile industry requires increased coordination on the part of various government agencies if such regulations are to be implemented in the most cost effective manner.

REFERENCES

American Textile Manufacturers Institute, "Background on Selected Areas of Regulatory Activity Affecting the U. S. Textile Industry", December 1975.

"Can Textiles Meet Proposed Dust Standards?", Textile World, June 1977, p. 23.

R. Dardis, "Cost-Benefit Analysis of Consumer Product Safety Programs", Final Report, NSF-RANN, 1977.

D. W. Lyons and H. G. Robbins, "The CPSC and Textile Flammability, Modern Textile Magazine, April 1976, pp. 7-17.

W. A. Storey, "Energy and Environmental Regulation Impact on the Textile Industry", American Dyestuff Reporter, August 1976, pp. 17-21.

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