Using a unique data set collected from three municipal environmental protection bureaus in China, we investigated the determinants of effective environmental regulations. The effective (actual) environmental regulations were measured by the actual pollution standard imposed on firms, the frequency of inspections done, and the actual pollution levy rates imposed on them.
The study show that plants located in higher GDP per capita areas and whose emissions are more likely to induce pollution damage face stricter effective environmental regulations, including more frequent inspections. Similarly, plants located in urban areas are subject to higher levy rates.
Our results offer important insights on the regulators’ behavior: environmental agencies do consider the public’s interests when they determine their monitoring and enforcement strategy. Effective environmental regulations on plants are strongly influenced by the local costs of and benefits from the plants’ pollution. This observation is consistent with the principle of environmental economics, wherein environmental regulation is the outcome of balancing economic activity and environmental degradation due to the pollution by taking all benefits and costs into account.