Optimal and Second Best Timing of Environmental Cleanups

Yearly allocations to EPA Superfund cleanups are relatively fixed, but like other federal agencies, the EPA is given significant flexibility over where to clean sites that do not pose an immediate threat to human health. Given that Superfund cleanups are associated with local economic benefits, such as increased housing values, we show in a theoretical model that spatially heterogeneous economic conditions can influence the optimal and second-best timing of environmental cleanups. When a localized environmental problem is identified, there may be an incentive for the regulator to wait to clean it up in order to use cleanup funds at sites where immediate productivity gains from remediation are more valuable. Using carefully calibrated Monte Carlo simulations, we find that expected welfare costlessly increases by .05%-.25% at site locations (i.e., a 0.2%-1.0% increase in consumption) if the EPA were to account for economic criteria in ordering their cleanup decisions. JEL Codes: Q52, Q58, H4