Environmental regulation of urban informal manufacturing firms: In search of appropriate policies

The Urban Informal Sector (UIS) is a major and expanding part of developing economies both in terms of employment and output. However, they cause substantial environmental damages and worsen living conditions, prompting authorities to impose rigid environmental regulations. Yet, these steps have been mostly arbitrary and based on adhoc popular sentiment or political exigencies and not on rigorous econometric analysis. Positive gains from the UIS in terms of employment, supply of cheap commodities, and recycling wastes have to be carefully weighed before delegating them to the city-fringes or closing them down. In this paper, we try to model the reactions of the firms faced with a regulation regime and the consequent impact on both individual firms and social welfare to arrive at certain parametric guidelines regarding appropriateness of various polices. It emerges that policy regulations should follow empirical estimation of the parameters and not be based on normative generalisation. JEL Codes: D21, D60, L51, O13, O17, Q28, Q52.