Dam Spillovers : The Direct and Indirect Costs from Environmental Constraints on Hydroelectric Generation

Full accounting of costs and benefits are essential to policy analysis, but regulations may have effects beyond firms covered by the policy. Considering a policy mandating stream flows below hydroelectric dams, I estimate both direct costs of regulation to regulated firms and spillovers to other electricity generators in the same market. Ignoring spillovers substantially underestimates true policy costs. These regulations increase market-wide costs as much as 19.8% and cause a substantial increase in pollution externalities. Further, decomposition of the effects reveal the cost of these policies will grow as climate change exacerbates water scarcity and renewable electricity generation capacity expands