United States
Environmental Protection
Agency
Air
Office of Air Quality
Planning and Standards
Research Triangle Park, NC 27711
FINAL REPORT
EPA-452/R-99-005
November 1999
£EPA
ECONOMIC IMPACT ANALYSIS OF
THE PROPOSED BOAT
MANUFACTURING NESHAP
-------
Economic Impact Analysis
of the Proposed
Boat Manufacturing NESHAP
U.S. Environmental Protection Agency
Office of Air and Radiation
Office of Air Quality Planning and Standards
Air Quality Strategies and Standards Division
Research Triangle Park, NC
Prepared under contract by:
Abt Associates Inc.
55 Wheeler Street
Cambridge MA 02138
November 1999
-------
Table of Contents
Section Page
List of Tables
List of Figures
Acronyms
Executive Summary
Chapter 1: Introduction 1-1
1.1 Scope and Purpose 1-1
1.2 Organization of the Report 1-1
Chapter 2: Industry Profile: Boat Manufacturing Source Category 2-1
2.1 Production Processes 2-1
2.2 Facilities and Employment 2-2
2.3 Products and Markets 2-4
2.4 Foreign Trade 2-8
2.5 Estimated Domestic Production by Boat Type 2-11
2.6 Vertical Integration and Specialization 2-15
2.7 Market Concentration and Competitiveness 2-16
2.8 Costs and Profit Margins 2-18
2.9 Industry Forecasts 2-19
Chapter 3: Compliance Costs 3-1
3.1 Introduction 3-1
3.2 Facility-level Emissions 3-2
3.3 Compliance Costs 3-3
3.4 Unit Compliance Costs 3-7
Chapter 4: Economic Impacts 4-1
4.1 Introduction 4-1
4.2 Methodology 4-2
4.3 Results 4-3
4.4 Facility Closures and Employment Effects 4-14
Chapter 5: Firm-Level Analysis 5-1
5.1 Introduction 5-1
5.2 Number of Small Firms 5-2
5.3 Criteria for Assessing Impacts 5-2
5.4 Impact of the Proposed Rule on Small Firms 5-4
5.5 Conclusions 5-6
References R-l
Appendix A: Facility-level Sales Estimates A-l
-------
Appendix B: Sensitivity Analysis B-l
Appendix C: Social Cost Equations C-l
-------
List of Tables
No. Title Page
2-1 Number of Establishments and Employment 1990 - 1995 2-2
2-2 Estimated Number of Boat Manufacturing Firms by Employment Size 2-4
2-3 Boat Sales (number and value) 1995-1997 2-5
2-4 Boat Sales (number) 1988-1997 2-7
2-5 Industry Value of Shipments 1987-1996 2-8
2-6 Boat and Ship Imports and Exports 1989-1996 2-9
2-7 U.S. Imports for Consumption & U.S. Domestic Exports 1993-1997 2-10
2-8 Estimated Domestic Production by Boat Type 1993-1997 2-11
2-9 Boat and Ship Costs and Value of Shipments 1990-1996 2-17
2-10 Solvency Ratios for SIC 3732, 1998 2-18
2-11 Profitability Ratios for SIC 3732, 1998 2-19
2-12 Projected Growth in Annual Domestic Production by Boat Type 2-22
3-1 Compliance Costs by Facility 3-8
4-1 Elasticity of Demand Estimates by Boat Type 4-6
4-2 Summary of Market-Level Economic Impacts of the Proposed MACT Standards 4-13
4-3 Estimated Equivalent Facility Closures by Market Segment 4-15
4-4 Estimated Change in Employment by Boat Market Segment 4-15
5-1 Estimated Number of Boat Manufacturing Firms by Employment Size 5-2
5-2 Compliance Cost to Sales Ratios by Firm Employment Size 5-5
-------
List of Figures
No. Title Page
2-1 Location of SIC 3732 Facilities Reporting Styrene Emissions in TRI, 1995 2-3
2-2 Outboard Boats 1988-1997 2-12
2-3 PWCs 1992-1997 2-12
2-4 Canoes 1994-1997 2-13
2-5 Sterndrives 1988-1997 2-13
2-6 Inboard Runabouts 1988-1997 2-14
2-7 Inboard Cruisers 1988-1997 2-14
2-8 Jet Boats 1992-1997 2-15
2-9 Sailboats 1991-1997 2-15
4-1 Market Model 4-1
-------
Acronyms and Abbreviations
D&B - Dun & Bradstreet
EPA - U.S. Environmental Protection Agency
FRP - fiber-reinforced plastic
HAP(s) - Hazardous Air Pollutant(s)
ITC - International Trade Commission
MACT - Maximum Achievable Control Technology
NMMA - National Marine Manufacturers Association
NESHAP(s) - National Emission Standard(s) for Hazardous Air Pollutants
PPE - personal protective equipment
PWC - personal watercraft
RFA - Regulatory Flexibility Act
SBA - U.S. Small Business Administration
SBREFA - Small Business Regulatory Enforcement Fairness Act
SIC - Standard Industrial Classification
TRI - Toxics Release Inventory
-------
1. Introduction
The U.S. Environmental Protection Agency (EPA) is required under Section 112 of the Clean Air Act to develop
National Emission Standards for Hazardous Air Pollutants (NESHAPs) for major and area sources of hazardous
air pollutants (HAPs). EPA is currently developing regulations on emissions of HAPs from the boat manufacturing
industry. This document provides analysis of the likely economic impacts of the proposed standards.
1.1 Scope and Purpose
The boat production process can results in emission of HAPs. These emissions impose costs on society however
these costs are not accounted for when producers and consumers make decisions regarding the quantity of boats to
produce and purchase. The costs of pollution are external to the market mechanisms that determine the price and
quantity of boats sold and thus these costs are often referred to as externalities. The proposed rule is designed to
internalize these external costs by establishing limits on the HAP content of materials used in the manufacture of
boats and limits for the amount of HAP released during certain manufacturing processes. These limits will impose
costs on the producers and consumers of boats but will also result in a decrease in the external cost of pollution.
The limits set by the proposed rule are based on the Maximum Achievable Control Technology (MACT) for the
industry. The term "MACT floor" refers the minimum control technology on which MACT can be based. For
existing major sources, the MACT floor is the average emissions limitation achieved by the best performing 12
percent of sources (if there are 30 or more sources in the category or subcategory), or best performing 5 sources (if
there are fewer than 30 sources in the category or subcategory). For the boat manufacturing category the MACT
floor was based on emissions at the top 12 percent of sources.
The MACT standards will apply to all existing major sources of HAP emissions. EPA used data from the Toxic
Release Inventory (TRI) to define major sources for this analysis. All facilities in SIC 3732 "Boat Manufacturing
and Repair" that were listed as major sources of styrene emissions in the 1997 TRI were considered facilities
potentially affected by the regulation. All potentially affected facilities whose current practices do not meet the
MACT floor standards will be required to alter their practices to comply with the rule. These facilities will incur
compliance costs and these compliance costs will have effects on producers, consumers, and society as a whole.
This document provides analysis on the likely economic effects of the proposed rule on affected and non-affected
producers, consumers and society as a whole. In addition, the analysis provides an indication of the effects of the
proposed rule on international trade, employment, and small businesses. While the EIA focuses on the cost of
pollution reduction it is important to keep in mind that these costs are being imposed in order to reduce the external
or hidden costs of pollution.
1.2 Organization of the Report
The remainder of this report is organized into five chapters:
<» Chapter 2: Industry Profile. This section provides an overview of the boat manufacturing industry. It
presents data on products and markets, foreign trade, market concentration, costs and profit margins, and
forecasts growth in the industry over the next five years.
»t* Chapter 3: Compliance Costs. This chapter summarizes the methodology used to estimate total facility-
level compliance costs. A detailed summary of the calculation of compliance costs can be found in the "Final
Chapter 1 Introduction 1-8
-------
Cost Procedures Documentation Memorandum" (U.S. EPA, 1999).
Chapter 4: Economic Impact Analysis. Chapter 4 describes the methodology for estimating the total social
cost of the proposed regulation and provides the results of this analysis. Additional discussion is provided on
the likely impacts of the rule on facility closures and employment.
Chapter 5: Small Business Regulatory Enforcement and Fairness Act (SBREFA) Analysis. The
Regulatory Flexibility Act (RFA) and the Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) require EPA to determine whether the rules will impose significant impacts on a substantial
number of small entities, and to take certain procedural steps if the rules might impose such impacts. Chapter
5 presents an analysis of the likely effects of the regulation on small businesses.
Appendices. Three appendices are provided with the analysis. Appendix A provides information on how
EPA estimated sales at the facility level. Appendix B provides a sensitivity analysis for the economic
analysis presented in Chapter 4. Appendix C presents the mathematical derivation of equations used in the
economic analysis presented in Chapter 4.
Chapter 1 Introduction 1-9
-------
2. Industry Profile: Boat Manufacturing Source Category
The industry profile provides the foundation for the development of the economic analysis. The major purposes of
the profile include the following:
»t* To present relevant industry financial and economic characteristics and trends—past, present, and future;
»t* To provide an understanding of the industry organization, including market structure and the conduct and
performance of affected firms;
<» To identify the key factors and trends that may influence the nature and magnitude of the economic impacts
and that should be addressed in the economic analysis (e.g., the significance of international trade); and
»t* to provide information necessary to identify and characterize special populations in accordance with
legislative and administrative directives (e.g., small businesses under SBREFA; state, local, and tribal
governments under UMRA; and minority and low-income groups under E.O. 12898 on environmental
justice).
This National Emission Standards for Hazardous Air Pollutants (NESHAP) will affect major sources of HAPs in
the boat manufacturing source category, which includes establishments involved in the manufacture of boats and
ships. The boat building industry is characterized by facilities engaged in the production of boats, primarily for
recreational use. In contrast, the ship building industry is engaged in the production of ships, barges and lighters,
primarily for military and commercial use. A major source, as defined in Section 112 of the Clean Air Act, is any
stationary source or group of stationary sources located within a contiguous area and under common control that
emits or has the potential to emit considering controls, in the aggregate, 10 tons per year or more of any hazardous
air pollutant or 25 tons per year or more of any combination of hazardous air pollutants.
This industry profile focuses primarily on Standard Industrial Classification (SIC) 3732, the boat building and
repairing sector. The ship building and repairing industry (SIC 3731) will also be affected to a minimal extent by
this rule, however, the use of reinforced plastics in ships is very minor in comparison to other input materials.
Therefore, the profile of the shipbuilding industry presented here is less detailed than that for the boat
manufacturing industry.
2.1 Production Processes
Most boat manufacturing facilities are dedicated to either power boats or non-power boats (sailboats, canoes and
kayaks) and rarely manufacture both. Boat hulls are usually produced by hand lay-up and/or spray-up on open
molds. After the mold is treated with wax, a pigmented gel coat is applied, forming the outer skin of the boat hull.
Once the gel coat has been laid down, boat resin is applied in conjunction with the reinforcement. Major structural
components that make up the inside, deck and cabin of the boat are built from fiber-reinforced plastic (FRP) in one
piece and then joined with the hull. (SRI International, 1996).
Most facilities use only one primary material, including FRP, aluminum, wood, or rotationally-molded
polyethylene. FRP is the most common material used for boat manufacturing, especially for power boats and
sailboats, because it can be easily molded to complex shapes, has a smooth glossy surface, and is practically
maintenance free. However, aluminum is also used in manufacturing a large portion of smaller boats, such as
rowboats, canoes, and freshwater utility and fishing boats. Aluminum is used because it is lightweight, durable,
Chapter 2: Industry Profile 2-1
-------
and low maintenance. Rotationally-molded (roto-molded) polyethylene has been used for about two decades to
build kayaks and canoes, and is now alos being used by a handful of manufacturers to build small sailboats and
power boats less than 20 feet long. Polyethylene can also be molded to complex shapes and is very durable, but
does not have the smooth glossy finish of FRP. Wood is used in custom building of all sizes and types of boats,
primarily by small independent builders.
2.2 Facilities and Employment
Table 2-1 provides information on the number of establishments (i.e., facilities), the number of employees, and the
distribution of facilities by employment range, for both SIC 3731 (ships) and 3732 (boats) for 1990 and 1995, as
well as the percent change from 1990 to 1995. Both the boat building and shipbuilding industries experienced
growth in the number of establishments over the five year period.
The number of boat building establishments grew by 14.8% while the number of shipbuilding establishments grew
by 5.8%. This growth came primarily from an increase in the number of small establishments with less than 20
employees. Larger establishments with more than 20 employees declined in number during the period. Overall the
two industries experienced a substantial decline in employment from 1990 to 1995. Shipbuilding employment fell
17.8% while boat building employment fell 9.6%.
Table 2-1: Number of Establishments and Employment 1990 - 1995
SIC
3731-
Ships
3732-
Boats
Year
1990
1995
%
change
1990
1995
%
change
Total Number
of
Establishments
532
561
5.5%
2,032
2,332
14.8%
Total
Employment
122,025
100,318
-17.8%
56,973
51,527
-9.6%
Number of
Establishments
with <20
employees
251
315
25.5%
1,581
1,922
21.6%
Number of
Establishments
with 20-99
Employees
160
153
-4.4%
315
300
-4.8%
Number of
Establishments
with 100-499
Employees
96
75
-21.9%
121
99
-18.2%
Number of
Establishments
with 500 or
More
Employees
25
18
-28%
15
11
-26.7%
Source: U.S. Department of Commerce. 1996b.
As is indicated in Table 2-1, there were 2,332 facilities involved in boat building and repairing (SIC 3732) in 1995.
Only some of these facilities will be affected by the proposed regulation. To determine which facilities would likely
be affected by this regulation, EPA used information from the Toxic Release Inventory (TRI) database. In 1995,
172 facilities under SIC 3732 (boats) reported to EPA's TRI, and 140 of these facilities are major sources for
HAP's. In addition, 51 facilities reported to TRI under SIC 3731 (ships), and of these, 23 facilities are major
sources of HAPs.
Figure 2-1 shows the number of facilities in SIC 3732 that reported to TRI, by state. Florida has the most boat
Chapter 2: Industry Profile
2-2
-------
manufacturing facilities (39) reporting emissions of HAPs. Five states (Florida, Tennessee, North Carolina,
Washington, and California) contain nearly half (83) of all boat manufacturers that report styrene emissions to
TRI. Most boat manufacturers reporting to TRI are in rural or suburban areas, although a few are in urban areas.
An urban area is an area(s) that, combined with the adjacent densely settled areas, has a minimum of 50,000
persons.
Figure 2-1:
Location of Boat Manufacturing Firms
Reporting Styrene Emissions in TRI, 1995
The number of small versus large boat building firms is of particular interest for the small business analysis (see
Chap
ter
5),
wher
e a
firm
is
defin
ed as
the
ultim
ate
legal
entity
owni
ngat
least
one
boat
build
ing
facili
ty-
The
Smal
1 Business Administration (SBA) provides small business thresholds by 4-digit SIC code. The SBA defines "small"
for SIC 3732 (boat manufacturing and repair) as firms with fewer than 500 employees. The Statistics of U.S.
Businesses (SUSB) provides annual data on the number of firms that own at least one facility in a given Standard
Industrial Category (SIC). Data in the SUSB are reported by the employment size of the parent firm. The 1996
SUSB indicates that there are 2,611 firms with facilities primarily engaged in SIC 3732. Of these, 2,590 firms
have fewer than 500 employees and only 21 firms have more than 500 employees. The data for SIC 3732 include
both firms that manufacture boats and firms that repair boats. However, the proposed rule will apply only to firms
that manufacture boats. The total number of firms from SUSB was adjusted to estimate the number of firms that
manufacture boats, using data from the 1992 Census of Manufactures. According to the Census, 283 facilities
Number of facilities
IVbrethan20 (1)
11 to 20 (3)
1to10 (24)
0 (23)
Chapter 2: Industry Profile
2-3
-------
specialized in boat repair in 19921. We do not have any information on the number of firms own these facilities.
We assumed that boat repair facilities are all owned by a single-facility firm with fewer than 500 employees. Using
these assumptions, the total number of boat manufacturing firms is estimated as 2,328, of which 2,307 are small
and 21 are large firms. (See Table 2-2.)
Data from Dun and Bradstreet were used to determine firm-level employment for all affected firms. Of the 78
affected firms, 66 employ fewer than 500 people. Table 2-2 below shows the distribution of boat manufacturing
firms by employment size for both affected and unaffected firms. Note that, while there are a large number of small
boat manufacturing firms, only 2.9% of these firms will be affected by the regulation. There are only 21 large boat
manufacturing firms, but 71.4% of these firms own facilities that are major sources of styrene and that will be
affected by the proposed rule. .
Table 2-2: Estimated Number of Boat Manufacturing Firms by Employment Size
Small Firms-SIC 3732
Less Small Firms Specializing in Boat Repair
Total Small Boat Manufacturing Firms
Large Firms-SIC 3732
Total Boat Manufacturing Firms
Total Number of
Firms
2,590
283
2,307
21
2,328
Number of
Affected Firms
66
0
66
15
78
Percent of Total
Firms That Are
Affected
2.5%
0.0%
2.9%
71.4%
3.4%
2.3 Products and Markets
The U.S. boat manufacturing industry produces a wide range of boats, from small canoes and kayaks to large
luxury yachts. For the purposes of this profile, the boat manufacturing industry has been divided into eight
separate boat segments according to boat size and location of the engine. They are:
»t* Outboard Boats: Small to medium-sized boats, powered by a self-contained detachable engine and
propulsion system, which is attached to the transom. This category of boats includes most runabouts, bass
boats, utility boats, offshore fishing boats and pontoons.
Inboard Runabouts: Mid-sized boats powered by an attached engine located inside the hull at the middle or
front of the boat, with a prop shaft running through the bottom of the boat. Over 90% of the boats in this
category are tournament ski boats (Boating Industry, 1995).
The Census of Manufactures reports the number of establishments (facilities) by primary product produced. An establishment is classified
in a particular industry if the value of its shipments of the primary products of that industry exceed the value of its shipments of the products of any
other single industry. The 283 establishments listed in Table 2-2 are classified as primarily boat repair facilities. See U.S. Department of Commerce,
1992, Table 5a.
Chapter 2: Industry Profile
2-4
-------
<» Sterndrives: Mid-sized boats powered by an attached inboard engine combined with a drive unit located on
the transom at the stern (rear) of the boat. Also known as inboard/outboards or I/Os.
<» Inboard Cruisers: Large boats powered by one or more inboard engines. Two engines are found in over
95% of these boats (Boating Industry, 1995).
<» Personal Watercraft (PWC): Small boats (most under ten feet long) powered by water jets instead of by an
open blade propeller, on which the rider stands or sits (as on a motorcycle). A popular brand of PWC is the
"Jet Ski".
»t* Jet Boats: Small to mid-size boats powered by water jets rather than a gas or diesel motor. The jets can be
located at either the stern or inboard.
»t* Canoes: Small boats powered by hand-held paddles.
<» Sailboats: This category of boats includes all sizes of boats powered, at least partially, by wind-driven sails.
This category includes both nonpowered sailboats and auxiliary-powered sailboats that include a motor.
Table 2-3 summarizes the number of boats sold in the United States in 1997 by boat type. A total of 610,140 boats
were sold in 1997, at a value of approximately $6.8 billion. Outboard boats and PWCs made up approximately
62% of the number of boats sold in 1997 and 40% of all boat sales revenue. Over half of the units sold in 1997
were small power boats 14 to 30 feet long using either outboard engines or sterndrive engines. The next most
popular type of boat sold was the personal watercraft (PWC).
Table 2-3: Boat Sales 1995 - 1997 (current $)
Boat Type
Outboard
Boats
Personal
Watercraft
Canoes
Year
1995
1996
1997
1995
1996
1997
1995
1996
1997
Units Sold
231,000
215,000
200,000
200,000
191,000
176,000
97,800
92,900
103,600
Retail Value
($1,000)
$1,426,420
$136,240
$1,421,400
$1,144,400
$1,208,648
$1,315,904
$55,941
$53,789
$61,124
Average Price
($)
$6,175
$6,336
$7,107
$5,722
$6,328
$6,454
$572
$579
$590
% Total Units
Sold
34.8%
33.9%
32.8%
30.1%
30.1%
28.8%
14.7%
14.6%
17.0%
Chapter 2: Industry Profile
2-5
-------
Table 2-3: Boat Sales 1995 - 1997 (current $)
Boat Type
Sterndrive
Powerboats
Inboard
Runabouts
Inboard
Cruisers
Jet Boats
Sailboats*
Year
1995
1996
1997
1995
1996
1997
1995
1996
1997
1995
1996
1997
1995
1996
1997
Total 1995
Total 1996
Total 1997
Units Sold
93,600
94,500
92,000
6,900
6,000
6,100
5,460
5,350
6,300
14,700
14,100
11,700
14,320
15,940
14,440
663,780
634,790
610,140
Retail Value
($1,000)
$1,791,310
$1,925,248
$2,068,528
$147,660
$126,234
$136,408
$1,169,500
$1,215,268
$1,669,103
$141,796
$143,284
$144,389
N/A
N/A
N/A
$5,877,027
$4,808,711
$6,816,856
Average Price
($)
$19,138
$20,373
$22,484
$21,400
$21,309
$22,362
$214,195
$227,153
$264,937
$9,646
$10,162
$12,341
N/A
N/A
N/A
—
—
—
% Total Units
Sold
14.1%
14.9%
15.1%
1.0%
0.9%
1.0%
0.8%
0.8%
1.0%
2.2%
2.2%
1.9%
2.2%
2.5%
2.4%
100%
100%
100%
Source: National Marine Manufacturers Association. 1997, pg. 4.
*Represents the number of sailboats produced in North America. Source: The Sailing Company of Miller
Sports Group LLC, 1998.
Table 2-4 presents historical data for boat sales from 1988 to 1997. As a recreational (luxury) good, boat sales are
influenced by overall economic conditions and normally decline during recessions, such as the one that occurred
during the early 1990s. A luxury tax imposed in 1990 (and repealed in 1993) of 10% on the portion of the retail
price of a pleasure boat that exceeded $ 100,000 also affected sales of large boats. (U.S. Department of Commerce,
1994: 37-12) Different market segments are also subject to growth or decline in response to consumer preferences.
PWC and jet boat sales, for example, have doubled and tripled, respectively, over the last 5 years. (NMMA, 1996)
Chapter 2: Industry Profile
2-6
-------
Table 2-4: Boat Sales 1988 - 1997
(Thousands of boats / year)
Boat Type
Outboard Boats
PWC*
Canoes
Sterndrive
Powerboats
Inboard Runabouts
Inboard Cruisers
^
Jet Boats
Sailboats
Totals
1988
355
NA
NA
148
7
14
NA
NA
524
1989
291
NA
NA
133
9
12
NA
NA
445
*Data not available (NA) for all years.
1990
227
NA
NA
97
8
8
NA
NA
339
1991
195
NA
NA
73
6
4
NA
9
278
1992
192
79
NA
75
6
4
4
11
370
1993
205
107
NA
75
7
3
8
12
417
1994
220
142
100
90
7
4
9
13
485
1995
231
200
98
94
7
6
15
13
565
1996
215
191
93
95
6
5
14
14
633
1997
200
176
104
92
6
6
12
NA
596
Average
Annual
Growth 88-97
-4.3%
20.4%
1.0%
-3.8%
-1.8%
-5.3%
32.1%
11.0%
1.4%
Average annual change is based on the longest period of available data.
Table 2-5 presents data on the value of shipments for SICs 3731 and 3732. While the value of shipments for ship
building (SIC 3731) rose steadily in the late 1980's and early 1990's, it has been on a fairly steady decline since
1992. Much of this decline may be attributed to a decrease in military procurement. (U.S. Department of
Commerce, 1994: 21-1) The value of shipments for the boat manufacturing and repair industry (SIC 3732) has
fluctuated throughout the ten years shown. There was a large decline in the early 1990's when the economy was in
a recession. However, value of shipments has been steadily increasing since then, and by 1997 was close to its pre-
recession peak value of shipments.
Chapter 2: Industry Profile
2-7
-------
Table 2-5: Industry Value of Shipments 1987-1996
(Millions of $)
SIC
3731-
Ships
Annual
%
Change
3732-
Boats
Annual
%
Change
1987
8,504
5,353
1988
8,810
3.6%
5,935
10.9%
1989
9,397
6.7%
5,739
-3.3%
1990
10,915
16.2%
4,998
-12.9%
1991
10,935
0.2%
3,676
-26.5%
1992
10,381
-5.1%
4,599
25.1%
1993
9,801
-5.6%
4,975
8.2%
1994
9,877
0.8%
5,334
7.2%
1995
9,544
-3.4%
5,640
5.7%
1996
9,811
2.8%
5,823
3.2%
Source: U.S. Department of Commerce, 1992 and 1996a.
2.4 Foreign Trade
Table 2-6 presents the value of imports and exports for both the boat manufacturing and repair industry (SIC 3732)
and the shipbuilding and repair industry (SIC 3731) for 1989 to 1996. For SIC 3732, exports today are only one
percent greater than they were in 1989. Since 1990, exports have declined every year except 1995, during which
they rebounded almost 30% only to decline again in 1996. The share of exports to the total value of shipments
declined steadily from a high of almost 21% in 1991, to a low of about 9.5% in 1994. In 1995, export share grew
slightly, to 11.7%. In contrast, the value of boat imports has been rising since 1991, and in 1996 totaled almost $1
billion. As a percent of the total value of shipments of the boat building industry, imports have been steadily
climbing since 1992, from 5.5%, to over 14% in 1996.
Boat imports come primarily from Canada and Japan. The U.S. imported over $274 million in boats from Canada
and over $106 million from Japan in 1995. (Boating Industry Magazine, 1995: 7) Much of the increase in U.S.
imports is attributable to personal watercraft imports from Canada. (U.S. Department of Commerce, 1994: 37-12)
The bulk of U.S. exports also go to Canada, which received a total of almost $140 million in exports from the U.S.
in 1995. (Boating Industry Magazine, 1995: 7)
In the shipbuilding and repair industry (SIC 3731), imports fluctuate from year to year. Exports also fluctuate, but
to a lesser degree. In 1996, the total value of imports and exports to value of shipments was only 4.1% of the total
value of shipments for the ship building and repairing industry.
Chapter 2: Industry Profile
2-8
-------
Table 2-6: Boat and Ship Imports and Exports 1989-1996
(Millions of $)
1989
1990
1991
1992
1993
1994
1995
1996
SIC 3731 Ship building and repair
Imports
Exports
Deficit/
surplus
145
313
168
14.8
434
419.2
14.4
321
306.6
50.9
652
601.1
517
379
-138
12.4
595
582.6
29.4
483
453.6
54
346
292
SIC 3732 Boat building and repair
Imports
Exports
Deficit/
Surplus
404
615
211
279
793
514
207
774
567
257
714
457
425
534
109
564
507
-57
807
658
-149
997
621
-376
Source: U.S. Census Bureau. 1996c.
Table 2-7 shows U.S. imports for consumption and U.S. exports for the different boat types from 1993 -1997 in
constant 1997 dollars, and their percentage change from 1993-1997. Data were obtained from the International
Trade Commission (ITC). The ITC collects data on exports and imports by boat type and size. In general, these
data were directly comparable to the eight boat categories used in this analysis. However, the ITC classification
does not include jet boats. The ITC classifies boats by the location and not type of engine. Thus, jet boats are
included in the import and export data for inboard runabouts, sterndrives and outboards, depending on the location
of the jet engine.
The U.S. primarily exports PWCs, sterndrives and inboard cruisers, based on the value of total exports. These
three products accounted for 68% of the value of all boat exports in 1997. The U.S. primarily imports PWCs and
inboard cruisers. These two products accounted for 74.2% of the value of total boat imports in 1997. While still
relatively small in value, the outboard, canoe and inboard runabout market segments showed remarkable growth in
imports overthe years 1993 to 1997. Imports of outboards grew by 172%, imports of canoes grew by 112% and
reported imports of inboard runabout grew by 235%. However, the growth in inboard runabout imports is likely to
be the result of the ITC classification of jet boats as inboard runabouts.
Chapter 2: Industry Profile
2-9
-------
Table 2-7: U.S. Imports for Consumption & U.S. Domestic Exports
1993-1997
(Thousands of 1997 $)
BOAT
TYPE
Outboard
Boats
PWC
Canoes
Sterndrive
Powerboats
Inboard
Runabouts
*
Inboard
Cruisers
Jet Boats
Sailboats
Total
Exports
1993
$55,416
$118,953
$9,323
$141,488
$69,696
$135,425
NA
$63,083
$593,384
1994
$48,055
$107,648
$9,939
$146,452
$73,296
$103,540
--
$60,349
$549,279
1995
$40,524
$136,880
$9,720
$196,128
$74,840
$127,795
$26,365
$80,468
$692,720
1996
$42,953
$108,287
$12,349
$195,717
$76,328
$101,112
$16,740
$81,309
$634,795
1997
$59,331
$123,111
$10,651
$199,364
$78,347
$134,860
$9,769
$57,405
$672,838
%
change
1993-
1997
7.1%
3.5%
14.2%
40.9%
12.4%
-0.4%
NA
-9.9%
Imports
1993
$4,531
$255,617
$7,030
$20,290
$18,639
$97,741
-
$67,821
$471,669
1994
$6,482
$364,848
$8,734
$29,805
$22,717
$123,308
$100
$55,189
$611,183
1995
$8,660
$535,121
$10,699
$31,598
$27,614
$151,253
$31,572
$50,734
$847,251
1996
$11,582
$602,949
$11,412
$28,688
$33,527
$145,265
$105,388
$81,199
$1,020,010
1997
$11,096
$382,370
$13,475
$27,051
$40,969
$90,184
$180,528
$68,006
$813,679
%
change
1993-
1997
144.9%
49.6%
91.7%
33.3%
199.8%
-7.7%
NA
0.3%
Source: U.S. International Trade Commission, 1998; provided by fax. Translated to 1997 dollars using the Consumer Price Index (CPI).
* Trade data for the Inboard Runabout market are inconsistent before and after 1995. This is largely due to a change in classification by the ITC (including potential inclusion of jet
boats in the trade data for this sector) and does not represent a real increase in trade in inboard runabouts. The percentage changes reported here reflect the data from 1993-1995 only.
Chapter 2: Industry Profile
Draft-Do Not Cite or Quote
2-10
-------
2.5 Estimated Domestic Production by Boat Type
The following subsections present historical data on domestic production for each of the boat markets. Domestic
production is not reported directly, but was calculated by subtracting imports from domestic sales and adding
imports.
Information on domestic sales, imports and exports are listed for each boat market. Data on domestic sales were
obtained from the National Marine Manufacturers Association (NMMA, 1996) while trade data were obtained
from the International Trade Commission (ITC 1998). An estimate of the value of net domestic production by boat
type was calculated as domestic sales plus exports minus imports. This value of production was used to estimate
the number of boats produced, dividing by the average price of boat for that boat type. Table 2-8 presents the
estimated domestic production by boat type for the years 1993-1997. Figures 2-2 through 2-9 graph the trends in
domestic sales from 1988 to 1997, as well as exports, imports and estimated net domestic production by boat type
for the period 1993-1997. Domestic sales data for sailboats, PWCs, jet boats, and canoes are presented for the
longest time series available (1991-1997 for sailboats, 1992-1997 for PWCs and jet boats, and 1993-1997 for
canoes). Note that data are reported by NMMA on the number of boats produced each year, but the estimates of
number of boats imported, exported and produced domestically are derived from reported dollar values, translated
into constant dollar terms and divided by 1997 average boat prices by boat type. The latter series are therefore
approximations and subject to some error. The trends in each market are summarized separately below.
Table 2-8 Trends in Estimated Domestic Production by Boat Type, 1993-1997 (1,000s of units)
Outboards
PWCs
Canoes
Sterndrives
Inboard
Runabouts*
Inboard Cruisers
Jet Boats**
Sailboats
1993
212
86
NA
80
7
4
8
12
1994
226
102
102
95
7
4
9
13
1995
235
138
96
101
7
5
15
15
1996
219
114
94
102
6
5
14
14
1997
207
136
99
100
6
6
12
14
* Data on imports and exports for the years 1996 and 1997 differ substantially from previous years due to changes in
classification of boats. For the remainder of this profile, the data on domestic production from 1996 and 1997 are not
used for the inboard runabouts market.
** Data on imports and exports of jet boats are not available as a separate category from the ITC. The ITC classifies
boats based on the location and not the type of engine. Thus, jet boats are included in the data on inboard runabouts,
Sterndrives, and outboards depending on the location of the engine. The data presented here represent domestic sales of
jet boats only.
Chapter 2: Industry Profile
2-11
-------
2.5.-? Outboards
Domestic sales of outboards declined steadily
and rapidly from 1988-1991. The 1991
number of boats sold was just over half of the
number sold in 1988. Since 1991, domestic
sales have been relatively flat. Both exports
and imports have been flat since 1993 and are
not significant compared with domestic sales in
this sector.
Figure 2-2
Outboard Boats
1988-1997
-D omestic Sales
Exports
Impo rts
-Estimated Net Domestic
Production
2.5.2 PWCs
Domestic sales of PWCs rose rapidly from 1992 to
1995 and have been declining since then. PWCs
were introduced to the boat market in the early
1990s and the initial rapid growth in sales is
consistent with an emerging market segment.
International trade is a significant factor in this
sector. Exports of PWCs have fluctuated between
16,000 and 23,000 boats per year. Imports rose
substantially from an estimated 40,000 boats in
1993 to 93,000 boats in 1996. Imports fell off
significantly in 1997 to only 59,000 boats.
Estimated net domestic production of PWCs has
increased roughly 60% since 1992.
Figure 2-3
PWCs
1992-1997
-Sf 25°
o
° 200
£ 100
50
0
-£_
x-"
-D omestic Sales
Exports
Impo rts
-Estimated Net
Domestic Production
Chapter 2: Industry Profile
2-12
-------
2.5.3 Canoes
Canoe data are available from 1993 to 1997. The
market for canoes has remained relatively stable
over that time frame. Domestic sales fluctuate
around 100,000 boats per year. Exports fluctuate
between 16,000 and 21,0000 canoes per year and
imports have been increasing steadily.
Figure 2-4
Canoes
1994-1997
1°0
(/)
§ 100 -
' — ' fin
°u
+J
o fin -
"o An -
•° 90 -
E ZU
= 0
^
— *— #^-
1994 1995 1996 1997
+ Dome stic Sales
— • Exports
Impo rts
— M Estimated Net
D omestic
Production
2.5.4 Sterndrives
Domestic sales of sterndrive powerboats fell
significantly in the late 1980s and early 1990s.
Sales rose again slightly from 1993 to 1994 and
have remained relatively flat since 1994.
International trade does not play a significant
role in this sector, although exports generally
exceed imports.
Number of Boats (1,000s)
Figure 2-5
Sterndrives
1988-1997
ifin
i^n -
i9n
100 -
Rn
Rn
40 -
9n
Q
*.
1
\v
^*?3r
R — R — W — Pi — B
s ? &
-------
2.5.5 Inboard Runabouts
Domestic sales of inboard runabouts have been
relatively stable since 1991. Exports have also
been steady, while imports of inboard runabouts
appear to have increased substantially in 1996
and 1997. There is no qualitative evidence in
the trade literature to confirm this growth rate in
imports for the inboard runabout sector. It is
suspected that this apparent increase is partially
due to changes in classification of the
international trade statistics for this category,
including potential inclusion of jet boat imports
and exports. Data on domestic production are
therefore not estimated for inboard runabouts
after 1995.
Figure 2-6
Inboard Runabouts
1988-1997
o 1U "
o
°- 8
1 6-
o
n- 4
o
<5 2
A
D 0 ~
z
A
"^ ^*v ^»— *~-«t
^lf__3|(-"* ^^^-n- M
^K ™
,# s# ^ ,#
^ D omestic Sales
— | Exports
Impo rts
— M Estimated Net
D omestic
Production
2.5.6 Inboard Cruisers
The inboard cruiser market was hurt severely by the
recession of the early 1990s and the imposition of
the luxury tax in 1990. Domestic sales of inboard
cruisers plummeted from an estimated 14,000 boats
in 1988 to 4,000 boats in 1991. The inboard cruiser
sector has rebounded slightly since 1991 but sales
are still well below the highs of the late 1980s.
International trade plays only a limited role in this
sector.
Figure 2-7
Inboard Cruisers
1988-1997
UT
« 19
J2 m
ro IU
O R -
m °
0 4 .
£ n
= u H
"S
,t
J,^'"'
*•* **"• 1f?~r~
rv^vjv-rvf^
,# ^ ^ f
+ Dome stic Sales
— • Exports
Impo rts
— M Estimated Net
D omestic
Production
Chapter 2: Industry Profile
2-14
-------
2.5.7 Jet Boats
Domestic sales of jet boats increased sharply
from 1994 to 1995 and have fallen off
somewhat since then. While no specific
international trade data were available on jet
boats from the ITC, qualitative evidence
indicates that the imports and exports of this
boat type have been rising over recent years.
1R
In 1b
2 14
o it
°- 12
J2 \(J -
o 8
m b
n- R -
0 °
*- A -
1 '
E z
= o-
Figure 2-8 Jet Boats
1992-1997
L^^
/ _\
H
^
S
/
1992 1993 1994 1995 1996 1997
+ D omestJc
Sales
2.5.8 Sailboats
Sales data on the sailboat sector are available
only from 1991 to 1996. In general, the
sailboat sector has seen a modest but steady
growth in domestic sales over this period.
Exports and imports have fluctuated slightly
but generally have remained between and
estimated 2,000 and 4,000 boats per year for
exports and between 2,000 and 3,000 units per
year for imports.
in
o
o
o
^-1
«r
s
o
m
o
V
.a
E
z
Figure 2-9
Sailboats
1991-1997
16 -i
14 -
19 _
m
8 -
u
4 -
n
., ,
. ^A^^^"^*
+^ -" •
jr1^11^
•m^^
***
rv^ ^^-w i
^ D omestJc Sales
— | Exports
Impo rts
D omestJc
Production
2.6 Vertical Integration and Specialization
Vertical integration refers to the extent to which a single firm produces raw material or intermediate inputs as well
as final goods and services, as opposed to specializing in one stage of production. Specialization refers to the
diversity of product lines produced more generally. To the extent that a regulation affects only a small part of a
firm's production, that firm may be better able to adjust production to minimize compliance costs or may be better
able to absorb the costs (other things being equal.) On the other hand, a vertically-integrated firm which produces
an input that is subject to regulation may bear a greater burden from the regulation than a competitor that
purchases its inputs and can more readily switch to inputs not affected by the regulation. The extent of vertical and
specialization may also affect a firm's supply response in the face of compliance costs. For example, a producer
making multiple products using the same production process being addressed by a regulation may have more ability
to recover some of its costs through price increases, if it faces inelastic demand in at least some of those markets,
Chapter 2: Industry Profile
2-15
-------
than a competitor that is specialized in one of the product markets with more elastic demand. The effect of vertical
and horizontal integration on relative compliance costs and on responses to regulation is a complex subject that
depends on the characteristics of each industry.
Many boat manufacturing facilities are somewhat vertically integrated in that they manufacture boat parts,
assemble the parts, and install the electronic, mechanical, and engine systems. However, some facilities (e.g., many
outboard boat manufacturers) specialize in the manufacture of boat bodies or hulls, which are sold without engines
or extensive fittings. Virtually all boat manufacturers purchase some inputs, including resins and gels, engines, and
mechanical and electrical components, from outside suppliers. In particular, boat manufacturers do not produce the
HAP-containing materials that will be affected by the proposed rule, so that the cost of switching materials should
not vary much among producers.
Specialization ratios provide a measure of the extent to which an industry specializes in production of its primary
product. A specialization ratio is provided by the U.S. Department of Commerce for every industry, and represents
the ratio of primary product shipments to total products for the establishments classified in the industry. (U.S.
Department of Commerce, 1992: A-4) The specialization ratio for the boat building and repairing industry (SIC
3742) was 99% in 1987 and 98% in 1992, the last year for which these data are available. (U.S. Department of
Commerce, 1993: 1-63) This indicates that facilities in this industry are highly specialized in the production of
boats, rather than producing diverse products at the same site. Firms owning those facilities may be more
diversified, however. Brunswick, which produces boats and a variety of other recreational products (such as
bowling equipment), and Kawaskai, Yamaha and Bombadier,which produce motorcycles and snowmobiles as well
as jet boats, are prominent examples.
For the ship building and repairing industry, the specialization ratio was 99% for both 1987 and 1992. (U.S.
Department of Commerce, 1993: 1-63) However, only a very small percentage of facilities (about 4%) in this SIC
will likely be affected by this regulation.
2.7 Market Concentration & Competitiveness
U.S boat manufacturing is relatively concentrated. The three largest boat manufacturing companies, in order of
market share, are Brunswick Corporation, Genmar Industries and Outboard Marine Corporation. These three
companies account for more than 60% of the total pleasure boat market, with the majority of remaining producers
accounting for at most a 1% to 2% market share each. (SRI International, 1996). However, U.S. boat producers
face foreign competition in most markets, and also compete with a variety of recreational products and other
consumer goods for consumer purchases. (See Section 2.9.1 below.) Therefore, U.S. boat manufacturers face
substantial competition in the broader market for recreational goods, and are not likely to be able to exercise
substantial market power or to earn excess profits.
Chapter 2: Industry Profile 2-16
-------
2.8 Costs and Profit Margins
Table 2-9 below shows the ratio of cost of materials and payroll to the value of shipments for both the boat building
and repair industry (SIC 3732) and ship building and repair (SIC 3731) industry2. While this ratio includes most
costs, such as all forms of compensation, materials, fuels, etc., it does not include all costs. Other expenses, such
as taxes and interest expenses, are not reflected in these figures. The ratio of these expenses to shipments have
remained relatively constant, increasing slightly in 1996. The boat industry ratio has declined slightly from a high
of 80% in 1993.
Table 2-9: Boat and Ship Costs and Value of Shipments 1990-1996
(Millions of $)
1990
1991
1992
1993
1994
1995
1996
SIC 3731 Ship building and repair
Shipments
Material Costs
Payroll
Ratio of material
and
payroll/shipments
10,915
4,493
3,606
74%
10,935
4,495
3,680
75%
10,381
4,065
3,624
74%
9,801
4,007
3,366
75%
9,865
4,103
3,326
75%
9,544
3,866
3,222
74%
9,811
4,365
3,175
77%
SIC 3732 Boat building and repair
Shipments
Material Costs
Payroll
Ratio of material
and
payroll/shipments
4,998
2,792
1,061
77%
3,676
2,058
824
78%
4,599
2,609
1,006
79%
4,940
2,910
1,026
80%
5,334
3,075
1,081
78%
5,640
3,237
1,098
77%
5,823
3,396
1,177
78%
Source: U.S. Department of Commerce, 1992 and 1996a.
The financial condition of producers affects their ability to absorb the costs associated with the MACT rule. Each
year, Dun and Bradstreet (D&B) publishes Industry Norms and Key Business Ratios (Dun and Bradstreet, 1998),
which reports certain financial ratios for a sample of firms in different industries. Tables 2-10 and 2-11 present an
analysis of selected solvency and profitability ratios for 103 establishments in SIC 3732 from the 1998 D&B
report.
2Cost of materials refers to direct charges actually paid or payable for items consumed or put into
production during the year, including freight charges and other direct charges incurred by the establishment in
acquiring these materials. Value of shipments measures the received or receivable net selling values, f.o.b. plant
(exclusive of freight and taxes), of all products shipped, both primary and secondary, as well as miscellaneous
receipts. This ratio represents a rough measure of profitability, with a higher ratio representing lower profitability.
Chapter 2: Industry Profile
2-17
-------
Solvency, or liquidity, measurements are significant in evaluating a company's ability to meet short and long-term
obligations. These figures are of primary interest to credit managers of commercial companies and financial
institutions. Exhibit 2-10 below presents three solvency ratios for SIC 3732 and includes a brief analysis of these
ratios, based on D&B's guidelines for interpreting the ratios.
Exhibit 2-10: 1998 Solvency Ratios for SIC 3732
Ratios
Quick Ratio
(Cash + Receivables
to Current Liabilities )
Current Ratio
(Current Assets to
Current Liabilities)
Current Liabilites to
Net Worth
Description
Indicates the protection afforded short term creditors,
showing the size of liquid assets available to cover debt
that falls due within one year.
Measures the degree to which current assets cover
liabilities, indicating the ability to retire current liabilities
and cover any possible shrinkage in the value of current
assets.
Shows the level of risks creditors are assuming with funds
that the owners have used to make permanent
investments.
1998 Median*
0.6
Analysis: A ratio of 1 to 1
(1.0) implies that the industry
is in a liquid condition. A
ratio of less than 1.0 is
considered acceptable for short
periods of time.
1.9
Analysis: A ratio of 2 to 1
(2.0) or better is considered
good.
64.0%
Analysis: This percentage is
considered average. Care
should be exercised when
extending credit to any firm
with current liabilities
exceeding 66.6% of net worth.
* Analysis is based on Dun & Bradstreet guidelines for interpreting financial ratios. Dun and Bradstreet, 1998.
Profitability ratios show how successful a business is in earning returns on invested equity and assets. Exhibit 2-11
below presents three profitability ratios for SIC 3732 and includes a brief analysis of these ratios.
Chapter 2: Industry Profile
2-18
-------
Exhibit 2-11: Profitability Ratios for SIC 3732
Ratios
Description
Median for 1998*
Return on Sales
(Profit Margin)
Shows the profits earned per dollar of sales as a measure of
the efficiency of the operation. Indicates the ability of the
firms to achieve satisfactory profits for owners and withstand
adverse business conditions.
3.1%
Analysis: Higher return on
sales margins represent
higher profits and a greater
ability to absorb compliance
costs. A return on sales ratio
of 3.1% is considered
respectable.
Return on Assets
Measures firm profitability by comparing operating profits
with assets available to earn a return. Indicates whether
firms are using their assets efficiently.
7.0%
Analysis: Companies
efficiently using their assets
will have a relatively high
return. Seven percent is
represents a healthy return
on assets.
Return on Net
Worth
(Return on Equity)
Analyzes the ability of management to realize an adequate
return on owners' investments.
13.4%
Analysis: Generally, a
relationship of at least 10
percent is regarded as a
desirable objective for
providing dividends plus
funds for future growth.
* Analysis is based on Dun & Bradstreet guidelines for interpreting financial ratios. Dun and Bradstreet, 1998.
2.9 Industry Forecasts
This section discusses expected future trends in domestic sales and production, with an emphasis on projecting the
number of new boat manufacturing facilities that might be constructed over the next five years. Any new boat
manufacturing facilities, or major expansions of existing facilities, would be subject to the proposed boat
manufacturing NESHAP.
The demand for boats is highly correlated with two potentially volatile and difficult to predict phenomena: the
business cycle (and its impacts on personal wealth) and the weather. These correlations add uncertainty to any
production forecast for this industry. Since recreational boats are a luxury good, demand fluctuates with the
business cycle. Recent growth in sales of high-end boats, such as inboard cruisers and yachts, has been attributed
in large part to the wealth effect created by a strong stock market. Forecasting long term boat sales based on the
sales patterns during a bull market is likely to skew forecasts and to predict more new facilities building more
expensive boats. For similar reasons, the retail demand for boats within a given season may not be indicative of
future sales because sales of boats within one or two seasons are somewhat correlated with the weather in those
seasons. Changes in retail demand due to the weather may have a current as well as a lagging impact on the
demand for and production of boats. If the weather is predicted far enough in advance (for example, El Nino), then
current production may be reduced in anticipation of lower demand. If poor weather is unexpected, current
Chapter 2: Industry Profile
2-19
-------
production may not adjust, increasing retail inventories and decreasing production the following season.
Given that the demand for boats is correlated with the business cycle and the weather, rational expectations would
suggest that boat manufacturers will react cautiously to changes in current consumption when determining future
production. It is expected that increases in demand resulting from unexpectedly good weather or an unexpectedly
good economy will be met initially through increased production at existing facilities rather than construction of
new capacity, due to the investment associated with establishing a new facility and uncertainty about the
sustainability of increased sales. Thus, the key to predicting the construction of new boat manufacturing facilities is
predicting sustainable shifts in consumer behavior and preferences. Owners are likely to consider several years'
worth of sales data when deciding whether to add capacity. Owners are also likely to consider market research
revealing changes in consumer preferences or other consumer characteristics that indicate which segments of the
recreational boating industry are likely to continue to grow.
2.9.1 Qualitative Forecasts for the Boat Manufacturing Industry
While specific predictions of sales by sector are not available, a review of several market analyses provided general
forecasts for the industry. These sources were used in combination with the historical trend data presented in
Section 2.2.3 to project sales to the year 2002. These general trends are summarized below.
»t* Boats have fallen in consumers' ranking of desired luxury goods. (DeFranco& Porter, 1996: 43) In
consumers' ranking of 17 luxury items (including new cars, vacations, remodeled home etc.), boats fell
from sixth in 1984 to sixteenth in 1995 and rebounded slightly to fifteenth in 1996. The increase in boat
sales over the past few years is likely the result of households purchasing more of all luxury items rather
than a change in the relative preference for boats. To the extent that households will purchase any luxury
items under less robust economic conditions, they would likely substitute away from boats towards the
more highly ranked luxury items.
<» PWCs and jet boats have introduced new consumers to the recreational boating market. (Kurowki, 1996:
12) PWCs and jet boats have attracted younger consumers to the recreational boating market. These
watercraft are less expensive and more mobile than traditional boats. Sales of PWCs and jet boats have
been increasing since their introduction, and sales are expected to continue to grow, albeit at a slightly
lower rate than in the last few years.
<» The market for used boats is increasingly shaping demand for new boats. (DeFranco, 1996: 10)
Consumers are becoming more sophisticated in their boat purchases and the boat market is beginning to
resemble the automobile market. Among other trends, consumers are demanding more financing options,
including leases. Used boat sales have increased as a percent of total boat sales. A strong used boat
market can have various implications for boat manufacturers. To the extent that consumers are trading in
used boats for new boats, increased sales of used boats may actually reflect increased demand for new
boats. However, used boats may also compete with new boat sales if total demand for boating is not
increasing.
»t* Recent sales figures indicate a trend towards high-end boats with mid-size boats suffering a decline.
(DeFranco & Porter, 1996: 43) Luxury boats have been faring well, but sales of mid-size boats targeted at
middle class families have been falling. High credit card, mortgage, automobile and other consumer debt
is said to be partially responsible for the declining demand for boats by middle class households.
Chapter 2: Industry Profile 2-20
-------
Exports of boats have been steady while imports have risen substantially. (Boating Industry Magazine,
1997: SI) Imports of PWCs and jet boats (primarily from Canada and Japan) have been largely
responsible for the imbalance of trade in the boat manufacturing industry. Exports of boats depend on the
weather and businesses cycles as well as consumer preferences in other countries. The European and
Japanese economies have not been experiencing high levels of economic growth as the U.S. has over the
past few years, and this is likely responsible for the stagnation of exports.
U.S. Industry and Trade Outlook predicts that recreational boat sales will grow at 2% annually over five
years. (U.S. Department of Commerce, 1998: 39-17) Imports are expected to increase by four percent
annually and exports will increase by six percent annually.
2.9.2 Forecasts of Domestic Boat Production
The information on historical trends in the boat manufacturing industry outlined in Section 2.2.3 was combined
with the qualitative forecasts for the boating sector in Section 2.2.8 to project growth in the industry to 2002. In
order to determine the growth in net domestic production for the next five years, the quantitative and qualitative
information on sales trends was used to determine a high and a low projected rate of growth in domestic sales for
each boat sector over the next five years. Total exports for the boat sector based on past export trends was then
projected. Finally, the import share of domestic sales was projected based on past trends and qualitative
information on import growth or decline. Net domestic production was then calculated as domestic sales minus the
import share plus exports. The change in net domestic production is divided by the average number of boats
produced at a single facility to obtain an estimate of the number of new boat manufacturing facilities that may be in
operation by 2002. Note that we are assuming that all growth in production requires new facilities. In reality some
of the growth in production will be absorbed by current facilities. Thus, these projections should be viewed as
upper-bound estimates of the number of new facilities.
Table 2-12 summarizes the forecasts for all eight boat types. As that table shows, only modest overall growth is
expected in the number of facilities (major sources) that might be subject to the propsoed NESHAP, ranging from a
high of 17 new facilities by the year 2002 to a low of three additional facilities in that year. Projections for each
boat type are presented separately below.
Chapter 2: Industry Profile 2-21
-------
Table 2-12: Projected Growth in Annual Domestic Production by Boat Type
Outboard
PWC
Canoes
Sterndrive
Inboard
Cruisers
Inboard
Runabouts
Jet Boats*
Sailboats
Total
Low
Growth
Rate
0.0%
3.0%
0.0%
-1.0%
0.0%
-1.0%
2.0%
1.0%
High Growth
Rate
1.5%
10.0%
2.0%
1.0%
3.0%
1.0%
10.0%
2.0%
Low Change
in Net
Domestic
Production by
2002
(387)
5,590
(2,078)
(4,310)
(47)
(-343)
8,304
4,596
11,325
High Change
in Net
Domestic
Production by
2002
17,060
53,240
6,117
4,772
897
157
10,674
5,172
98,090
Low Number
of Projected
New Major
Sources by
2002**, ***
0
0
0
(1)
0
0
1
3
3
High
Number of
Projected
New Major
Sources by
2002**, ***
6
1
0
1
4
0
1
4
17
* Projections for jet boats are of domestic sales and not domestic production because import and export data are not
available.
** Represent the maximum number of new facilities because all growth in sales is assumed to be from new
facilities, rather than from expanded production at existing facilities.
*** Calculated assuming that the percent of domestic production produced by major sources remains the
same as currently.
2.9.2a Outboards
Domestic sales of outboard boats fell over 40% from 1988-1992. However, in the past five years (1993-1997)
both domestic sales and annual domestic production have been relatively constant. Qualitative information on boat
sales suggests a decline in the ranking of boats among leisure products and the general trend away from smaller and
mid-size boats. Given these trends, a low forecast for domestic sales of zero growth and a high forecast of 1.5%
was used. Exports are forecast to remain constant at approximately 8,000 boats per year. The import share is
projected to remain relatively constant at 0.8% of domestic sales.
Using the low forecast results in a decline in domestic production of outboards of almost 400 boats. The decline is
caused by the slight increase in the import share. Using the high forecast rate results in a total increase in annual
domestic production of 17,000 boats by 2002.
Chapter 2: Industry Profile
2-22
-------
2.9.26 PIVCs
Over the six years for which data are available for PWCs, net domestic production has grown at an average annual
rate of 12.0%. Domestic production of PWCs rose quickly shortly after PWCs entered the recreational boat market
and have appeared to level off as this market segment has matured. Sales over the last two years have actually
declined. Given these recent trends, a low forecast growth rate for domestic sales of three percent and a high
growth rate of 10% was used. Exports are assumed constant at 19,000 boats per year while the import share is
forecast to remain at about 40% of domestic sales.
Based on the low forecasted growth rate of three percent, annual domestic PWC production will increase by
approximately 5,600 boats by 2002. Based on a high forecast growth rate of 10%, annual domestic PWC
production will increase by approximately 53,000 boats by 2002.
2.9.2c Canoes
The canoe market has remained stable over the past 5 years. Zero growth is used as a low projection of domestic
sales and two percent growth as a high projection. Exports are projected to remain constant at 18,000 boats per
year. The import share has been steadily rising in the sector and it is projected that it will increase to 24% of
domestic sales by 2002.
Using the low forecast, a decline in annual domestic production in this sector is projected. Using the high forecast,
an increase in domestic production of approximately 6,100 boats per year by 2002 is projected.
2.9.2d Sterndrives
Over the ten year period from 1988-1997, sterndrive production has fallen by over 30% (an average of 3.2% per
year). However, most of that decline occurred in the years 1988 to 1991. Since 1994, sterndrive production has
been fairly steady at roughly 100,000 boats produced per year. The low forecast for annual domestic sales in this
sector is negative one percent and the high forecast growth rate is one percent. Exports in this sector are projected
to hold steady at 9,000 boats per year. The import share of domestic sales is also expected to hold steady at 1.3%
of domestic sales.
Using the low forecast growth rate leads to a decline in annual domestic production of roughly 4,300 boats. The
high forecast growth rate results in an increase in annual domestic production of 4,700 boats.
2.9.2e Inboard Runabouts
Domestic sales of inboard runabouts decreased annually by an average rate of 1.8% per year from 1988 to 1997.
Trends in trade data are skewed by the substantial reported increase in exports and imports in 1996 and 1997. As
previously mentioned, these increases are not substantiated in the trade literature. We use negative one percent as a
low forecast for growth in domestic sales for this sector and one percent as a high estimate. Given the previously
mentioned difficulties with the international trade data for this sector we assume that exports will remain constant at
the 1995 rate of 1,000 boats per year and that the import share will also remain at the 1995 rate of 18% of
domestic sales.
Chapter 2: Industry Profile 2-23
-------
Using the low growth rate, a decline in domestic production of approximately 340 boats in this sector is projected
for the year 2002. Based on the high growth rate of one percent, a very slight increase in production of
approximately 150 boats is projected for 2002.
2.9.21 Inboard Cruisers
Domestic sales of inboard cruisers fell over 50% from 1988 to 1997 (an average of-5.3% annually). As with the
sterndrive market, most of the decline in inboard cruiser production occurred in the years 1988-1991. Recent sales
have been steadily increasing. Inboard cruisers are a luxury boat and the recent increase in sales is thought to be a
function of the wealth effect created by a strong stock market, as well as the 1993 repeal of the luxury tax on boats
valued at over $100,000. Because of the potential volatility in the stock market, zero growth is used as the low
forecast. As a high forecast, an increase in sales of inboard cruisers of three percent is assumed. These two growth
rates reflect the recent history of increased sales but assumes a leveling off of the growth rate based on potential
volatility of stock market returns. Exports in the inboard cruiser segment are assumed constant at 500 boats per
year. The import share of domestic sales was approximately 10% for the early part of this decade. In 1997, it fell
to 5.6%. A six percent import share for this sector is projected to 2002.
Using the lowt growth rate, a slight decline in production is predicted for this sector. Based on the high growth
rate of three percent, an increase in annual production of almost 900 boats by the year 2002 is projected.
2.9.2g Jet Boats
Jet boat sales increased substantially after introduction in the early 1990s and have declined in recent years. No
reliable information was available on exports or imports of jet boats. A high growth in domestic sales of 10% is
estimated and low growth rate of two percent for this sector.
Using the low two percent growth rate, it is expected that an additional 11,200 jet boats per year will be sold in the
U.S. by 2002. Based on the high forecast, there will be an additional 17,100 jet boats sold annually by 2002.
Some of these jet boats are expected to be imported and the increase in annual domestic production could be less
than the increase in domestic sales.
2.9.2h Sailboats
Data on sailboat production were only available from 1991-1997. Domestic sales of sailboats rose substantially
between 1992 and 1994 but have tapered off since. A low forecast of one percent was used, with a high forecast
rate of two percent. Exports are projected to remain at about 7,000 boats per year and the import share is projected
to remain constant at 24% of domestic sales.
Using a one percent growth rate, it is predicted that a growth of annual production of 4,600 boats by 2002 will
occur. Based on the high growth rate of two percent, sailboat production will increase by 5,200 boats over that
time frame.
Chapter 2: Industry Profile 2-24
-------
3. Compliance Costs
3.1 Introduction
The NESHAP for the Boat Manufacturing source category regulates emissions of hazardous air pollutants (HAPs)
resulting from the boat manufacturing process. Facilities that are considered major sources of HAP emissions in
this industry will be required to change their material use and/or production processes to attain a level of emissions
control equal to the maximum achievable control technology (MACT) floor. Costs of reducing HAP emissions to
the MACT floor are estimated for each of these potentially affected facilities.
The economic impact analysis (EIA) relies on the estimate of the facility-level costs of complying with the proposed
regulation to determine how the producers and consumers in the market will react to the regulation (See Chapter 4)
. This chapter summarizes the procedure used to estimate facility-level compliance costs. The document entitled,
"Final Cost Procedures Documentation Memorandum" (U.S. EPA, 1999) contains a detailed description of how
facility-level compliance costs are calculated.
The compliance cost estimation procedure has the following steps:
»t* Determine which facilities are likely to be required to comply with the regulation. EPA used data from the
Toxic Release Inventory (TRI) to determine which boat manufacturing facilities were likely to be required
to comply with the proposed regulation. EPA assumed that all facilities in SIC 3732 "Boat Manufacturing
and Repair" that are major sources of styrene emissions in TRI will be required to comply with the rule.
<» Determine potential emission points, where an emission point is defined as a material that contains HAPs
and/or a production process that releases HAPs.
»t» For each affected facility, determine if current materials and processes meet the MACT standards at each
emissions point. If current materials and/or processes do not meet the MACT standard then facilities must
switch to materials with a lower HAP content and/or processes that release lower levels of HAPs.
»t» For each affected facility, determine the total cost of switching from materials with higher HAP content to
materials with lower HAP content and the cost of changing production processes to release lower levels of
HAPs.
»t» Transform the total facility-level compliance cost into total fixed costs and variable costs per boat
produced. These are the two facility-level cost components used as inputs to the EIA.
Section 3.2 lists the different emissions points and describes how EPA determined if a facility's current materials
and/or processes meet the MACT floor for HAP emissions. The costs of switching materials and processes are
described in Section 3.3. Section 3.4 describes the methodology for converting total compliance costs into fixed
costs and variable costs per boat produced.
3.2 Facility-level Emissions
EPA determined that there were 12 potential emission points for HAPs in the boat manufacturing process. These
12 emissions points fall in two broad categories: production materials that contain HAPs, and production processes
that release HAPs.
Chapter 3 Compliance Costs 3-1
-------
»t* Production materials the contain HAPs:
* Production resin
* Tooling resin
* Pigmented gel coat
* Clear gel coat
* Basecoat gel coat
* Tooling gel coat
* Resin and gel coat application equipment cleaning solvents
* Resin and gel coat mixing container covers
* Aluminum wipedown and surface preparation solvents
* Aluminum boat hull and deck coatings
* Carpet and fabric adhesives
»J» Production processes the release HAPs:
* Resin atomized spray guns
In addition to these 12 emissions points, EPA estimated monitoring, recordkeeping, and reporting (MRR) costs and
the cost of testing new production materials to insure that they will meet performance standards.
The facility-level cost of compliance is estimated as the sum of the costs of complying with the MACT floor at each
of the potential emissions points. For the purpose of this analysis, facilities that do not meet the MACT floor must
switch to materials that contain lower levels of HAPs and/or switch to production processes that release lower
levels of HAPS at every emission point for which current practices are not sufficient. Because the proposed
NESHAP will probably allow emissions averaging among some types of materials and processes some facilities
may reduce their cost of complying with the rule by reducing emissions more than required at emissions points
where reductions are achieved relatively inexpensively and reducing emissions less than required at emissions points
where reductions are relatively costly. The estimated costs of complying with the proposed NESHAP do not
consider any potential cost reductions from emissions averaging. It is difficult to determine how particular facilities
will implement the variety of options of emissions averaging or whether they will use it to achieve greater operating
flexibility at the same regulatory cost. Therefore, the estimated compliance costs are an upper-bound estimate in
that we assume that no facilities will use emissions averaging.
EPA conducted a survey of approximately one-third of the major source boat manufacturing facilities. Detailed
data on the specific materials and the HAP content of those materials used was obtained for each of the surveyed
facilities. The survey also requested information on the amount of material used or the number of processes used
Chapter 3 Compliance Costs 3-2
-------
for the surveyed facilities. Thus, for approximately one-third of the affected facilities, we could use survey data to
determine whether current materials and/or processes meet the MACT floor for HAPs emissions at each emission
point. If a facility did not meet the HAP floor at a given emissions point, we used data from the survey to
determine the amount of material or the number of production processes that would need to be changed to insure
compliance with the rule.
For the remaining two-thirds of the facilities, we did not have data on the type and HAP content of materials
currently used nor did we have information on the amount of materials and number of processes used. For the bulk
of facilities, we only had data on reported styrene emissions in TRI. For these non-surveyed facilities we estimated
both the HAP content of the materials used and the amount of material and number of processes used as discussed
below.
<» HAP content: Because the HAP content of the materials currently used by non-surveyed facilities is
unknown, the analysis assumes that all of the non-survey facilities will need to switch to lower HAP
materials, or change processes to comply with standards based on the MACT floor at all 12 emissions
points. This approach overestimates the costs of compliance for at least some of the non-surveyed
facilities.
»t* Amount of material/processes used: EPA used data on the amount of materials and processes from the
surveyed facilities and data on total styrene emissions levels from both the surveyed and non-surveyed
facilities to impute the amount of materials and the number of processes used by the non-surveyed
facilities. For each of the 11 materials-based emissions points, EPA estimated a relationship between total
styrene emissions and total material use for the surveyed facilities. This relationship was then applied to
the non-surveyed facilities based on the total styrene emissions reported in TRI to obtain an estimate of the
amount of materials used by the non-surveyed facilities. For the process-based emission point, EPA used a
similar estimation procedure to infer the number of atomized resin spray guns used at non-surveyed
facilities.
3.3 Compliance Costs
There are four categories of compliance costs that a facility could potentially incur under the proposed rule:
»t* Switching production materials,
»t» Changing production processes;
»t» Monitoring, recordkeeping and reporting; and
»t* Testing new production materials.
Eleven of the 12 emissions points listed in Section 3.2 involve potential changes in materials used by an affected
facility. The procedure used to estimate the cost of switching to materials with lower HAP content is addressed in
Section 3.3.1. One of the emissions points-resin application technology-is a process-based emission point and is
addressed separately in Section 3.3.2 below. The estimation of monitoring, recordkeeping, and reporting (MRR)
costs is addressed in Section 3.3.3. Materials testing costs are the subject of Section 3.3.4.
3.3.1 Materials Switching Costs
Chapter 3 Compliance Costs 3-3
-------
EPA estimated the facility-level materials costs at each emission point by determining what the cost of switching to
materials with a lower HAP content would be and then summing the switching costs for all emission points. If a
facility's current materials satisfy the MACT floor at a given emission point then the switching cost is zero for that
particular emission point.
The cost of switching materials (e.g., resins) were estimated as the difference in list prices between materials with a
higher HAP content and the lowest-priced material with a HAP content at or below the MACT floor. This cost
difference was calculated separately for materials used at each emission point. The list prices were obtained from
material vendors. The analysis uses list prices because actual prices are variable among facilities depending on the
amount purchased, often according to proprietary pricing agreements.
For each emissions point, facilities were grouped into three categories based on the amount of information obtained
by EPA on materials use and cost:
<» Surveyed facilities for which the type of material, HAP content, and list price were known;
<» Surveyed facilities for which the type of material and HAP content were known but for which the list price
was not available; and
»t» Non-surveyed facilities.
For the surveyed facilities where the list price of current materials was known EPA calculated the switching cost as
the cost of the current material minus the cost of the least-expensive material with a HAP content at or below the
MACT floor.
For surveyed facilities where the price of the material currently used is unknown, EPA developed a default cost of
switching. The default cost difference is the average cost difference between all materials with a HAP content
above the MACT floor and the lowest priced material with a HAP content at or below the floor. For example, a
default cost might be calculated as the average cost difference for all materials with a HAP content above 35% and
the lowest priced material with a HAP content below 35%. The total amount of material used by surveyed facilities
was multiplied by this default cost to obtain the total switching cost.
For non-surveyed facilities, EPA does not know the HAP content of the material currently used. The switching cost
for non-surveyed facilities was imputed from the data from surveyed facilities. For each of the surveyed facilities
EPA divided the total switching cost by the number of units of material used to obtain an average switching cost
per unit of material used. The estimated amount of material used by a non-survey facility was then multiplied by
this average switching cost per unit material used to estimate the cost of switching for non-surveyed facilities.
3.3.2 Process Change Costs
The only process change considered by the proposed rule is a change in resin application technology from atomized
spray guns to non-atomized flowcoaters. The cost of complying with the requirements for non-atomized resin
application has four elements.
<» The cost to switch from atomized resin spray guns to non-atomized resin flowcoaters.
Chapter 3 Compliance Costs 3-4
-------
»t» The cost savings from the reduced need for personal protective equipment (PPE) with non-atomized resin
application system.
<» The cost savings from reduced resin consumption because of the greater transfer efficiency of flowcoaters
compared to spray guns.
»t» The cost savings from the reduced use of floor coverings associated with reduced resin overspray.
EPA estimated the cost of switching to flowcoaters from spray guns as the net annual difference in cost between a
facility that continues to use spray guns, and the same facility switching from spray guns to flowcoaters before the
spray guns have reached the end of their useful economic life. That is, the costs are estimated for the same plant
under two scenarios: (1) the plant operates spray guns in the absence of the rule and (2) the same plant must switch
to flowcoaters while the spray guns are still functional.
This net cost difference was estimated for each of the surveyed facilities. EPA used the results from the surveyed
facilities to estimate costs for the non-surveyed facilities.
For each surveyed facility EPA knew the number of spray-guns currently in use. EPA assumed that all spray guns
are halfway through their economic life at the time the regulation takes effect. The cost analysis covers a 10 year
period. Using this time frame, EPA calculated the difference in total capital costs, operating and maintenance
costs, net of the costs savings such as reduced PPE costs and reduced floor covering costs for both spray guns and
flowcoaters. The difference in these costs is the cost of switching from spray guns to flowcoaters.
The flowcoaters themselves require an initial capital outlay and are slightly more expensive to operate and
maintain. However, EPA estimates that the majority of survey facilities will experience overall cost savings when
floor covering and resin cost savings are added to the flowcoater cost impacts. If the net cost (capital and OM
costs less the cost savings) was negative for a given surveyed facility, the total cost of switching from spray guns to
flowcoaters was assumed to be zero. We assumed that if a facility is expected to see an overall cost saving from
changing production processes, the facility will make this change voluntarily when the current capital associated
with the process depreciates. Thus, the cost savings are not directly attributable to the regulation and should not be
used to offset cost impacts for other regulated materials, such as gel coats or adhesives.
For non-surveyed facilities, we assumed the cost impact for switching to flowcoaters was zero because the majority
of surveyed facilities had no net cost increase from changing this production process.
3.3.3 Monitoring, Recordkeepina, and Reporting (MRR) Costs
The cost analysis includes an estimate of the additional managerial and clerical hours needed for monitoring,
recordkeeping, and reporting (MRR) based on the compliance activities required. EPA estimated that there are 11
manufacturing operations that could have separate MRR costs. Total managerial and clerical hours were
calculated separately for each operation.
Surveyed facilities were assigned the average annual MRR cost for all operations currently performed at the
facility. The average annual hours was based on the estimated hours required during the first 3 years of
compliance. The estimated hours in the first year are higher than those in the second and third years because of
hours needed to learn the rule and set up recordkeeping systems (e.g., spreadsheets) for monitoring compliance.
Total MRR costs were determined by multiplying the average annual management and clerical hours by the
associated labor rate for that category taken from the Bureau of Labor Statistics. Non-surveyed facilities were
Chapter 3 Compliance Costs 3-5
-------
assigned the average annual MRR cost for all the surveyed facilities.
3.3.4 Materials Testing Costs
EPA included costs for testing the physical properties of materials for each facility that has to switch materials at
one or more emission point. The purpose of the tests is to insure that the new materials that meet the MACT floor
requirements for HAP content also satisfy the facility's production needs. Tests will likely focus on finding a
material with a HAP content at or below the MACT floor that maintains the quality of the final product.
Testing costs were estimated for facilities switching any of their production resins, tooling resins, pigmented gel
coats, clear gel coats and/or tooling gel coats to low-HAP materials. No testing costs were calculated for basecoat
gel coats because they are "work-off products made from other surplus gel coats. The analysis assumed that
facilities will need to perform three tests per material to find a suitable low-HAP replacement for higher-HAP
materials.
Facilities were assigned testing costs for every emissions point where the facility is expected to change the material
used. The total testing costs at the facility was then annualized over 10 years. These costs may be over-estimated
for some facilities for the following three reasons.
<» The facility may rely on performance data provided by the material supplier, rather than doing their own
tests.
»t» The material supplier may test samples prepared by the boat manufacturer and incur the cost of testing.
»t* If several facilities are operated by the same company, only one series of tests may be needed for materials
that are used at all facilities.
3.4 Unit Compliance Costs
The total "engineering" costs sum to $15.4 million per year. The economic model uses this information as inputs to
determine the total social cost of the rule (i.e., taking into account the reactions in the boat markets by producers
and consumers. There are two compliance costs inputs to the economic analysis presented in Chapter 4:
<» Facility-level variable compliance costs per boat produced, and
<» Facility-level fixed compliance costs.
The categories of costs described in Sections 3.3.1 to 3.3.3 (i.e., material switching, process changes and MRR
costs) are all variable compliance costs, meaning those costs that vary with the level of production at a given
facility. The materials testing costs described in Section 3.3.4 are fixed costs, meaning those costs that will be
incurred at the same level regardless of the level production at the facility as long as the facility remains in
operation.
The sum of the materials switching costs, the process change costs and the MRR costs is the total variable
compliance costs for each facility. However, the variable compliance cost per boat produced is the necessary input
to the economic model. EPA estimated the number of boats produced at each facility and used these estimates to
transform total variable compliance costs into variable costs per boat produced.
Chapter 3 Compliance Costs 3-6
-------
For each facility, EPA had an estimate of facility-level sales and information on the type of boat(s) produced at the
facility (See Appendix A). The National Marine Manufacturers Association (NMMA) publishes data annually on
the average price of a boat by boat type. EPA used the facility-level sales estimates and the average price per boat
to estimate the total number of boats produced at each affected facility. For each facility, EPA calculated unit
variable compliance costs by dividing the total variable compliance cost by the total number of boats produced.
The testing costs are the only fixed cost of compliance. These costs do not need to be transformed into unit costs
fortheEIA.
Table 3-1 provides cost information for all facilities for which costs were estimated. The data provided includes,
the type of boat(s) produced, total variable costs, variable cost per unit produced, and total fixed costs.
Chapter 3 Compliance Costs 3-7
-------
Table 3-1: Compliance Cost Per
Facility ID
1
2
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
25
26
27
28
29
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
Type of Boat
Outboard
Outboard, Sterndrive, Inboard Cruisers
Outboard, Inboard Runabout, Sterndrive
Outboard, Inboard Runabout, Sterndrive
Outboard, Inboard Runabout, Sterndrive
Outboard, Inboard Runabout, Sterndrive
Outboard, Inboard Runabout, Sterndrive
Outboard, Inboard Runabout, Sterndrive
Outboard, Inboard Runabout, Sterndrive
Sailboats
Outboard, Inboard Runabout
Outboard, Inboard Runabout
Inboard Runabout
Outboard, Sterndrive, Inboard Cruisers
Sterndrive
Sailboats
Outboard, Sterndrive
Outboard
Outboard
Outboard
Jet Boats
Outboard
Inboard Cruisers
Sailboats
Outboard
Sterndrive, Inboard Cruisers
Outboard, Inboard Runabout, Sterndrive,
Jet Boats
Outboard
Sailboats
Outboard
Outboard, Sterndrive, Canoe
Inboard Runabout, Inboard Cruisers
Inboard Runabout, Sterndrive, Inboard
Cruisers, Jet Boats
Inboard Runabout, Sterndrive, Inboard
Cruisers, Jet Boats
Inboard Runabout, Sterndrive, Inboard
Cruisers, Jet Boats
Inboard Runabout, Sterndrive, Inboard
Cruisers, Jet Boats
Inboard Runabout, Sterndrive, Inboard
Cruisers, Jet Boats
Inboard Runabout, Sterndrive, Inboard
Cruisers, Jet Boats
Inboard Runabout, Sterndrive, Inboard
Cruisers, Jet Boats
Inboard Runabout, Sterndrive, Inboard
Cruisers, Jet Boats
Sterndrive, Inboard Cruisers
Total Variable
Cost
$31 ,755
$228,654
$116,433
$48,503
$27,641
$73,336
$46,019
$127,438
$66,741
$31 ,553
$59,128
$107,709
$38,836
$401,183
$155,745
$36,378
$77,739
$34,379
$116,318
$72,576
$77,906
$323,871
$29,939
$31 ,549
$109,033
$78,535
$32,777
$26,384
$31 ,021
$86,285
$147,863
$340,591
$49,232
$38,467
$21,116
$88,830
$43,264
$176,150
$91 ,088
$71 ,586
$16,799
Facility
Total Variable
Cost per Unit
$18
$82
$40
$33
$13
$28
$27
$19
$63
$55
$10
$108
$126
$133
$93
$47
$47
$68
$24
$6
$18
$35
$93
$28
$59
$96
$4
$55
$73
$10
$15
$705
$51
$21
$18
$45
$18
$953
$197
$33
$10
Total Fixed Cost
$5,126
$3,844
$1,281
$1,281
$1,281
$1,281
$1,281
$1,281
$1,281
$5,126
$2,563
$5,126
$2,563
$5,126
$3,844
$5,126
$3,844
$2,563
$3,844
$2,563
$3,844
$6,407
$2,563
$3,844
$5,126
$3,844
$5,126
$5,126
$3,844
$5,126
$3,844
$5,126
$3,844
$2,563
$2,563
$3,844
$2,563
$1,281
$3,844
$3,844
$2,563
Chapter 3 Compliance Costs
3-8
-------
Table 3-1: Compliance Cost Per Facility
Facility ID
48
49
51
52
53
54
101
103
106
109
110
112
113
115
120
121
124
201
202
203
205
207
208
209
211
213
214
218
219
221
222
223
226
227
228
230
231
232
233
235
236
238
239
240
241
242
243
245
Type of Boat Total Variable Total Variable Total Fixed Cost
Cost Cost per Unit
Sailboats
Outboard
Outboard, Sterndrive, Inboard Cruisers
Outboard, Sterndrive, Inboard Cruisers
Outboard
Outboard, Inboard Runabout, Sterndrive
Inboard Cruisers
Sterndrive
PWC, Jet Boats
Sailboats
Sailboats
Sterndrive
Outboard, Sterndrive
Outboard
Outboard
PWC
Inboard Cruisers
Outboard
Outboard
Outboard
Inboard Runabout
Outboard, Inboard Runabout, Sterndrive
Inboard Cruisers
Sailboats
Outboard
Outboard
Inboard Runabout, Inboard Cruisers
Inboard Runabout, Sterndrive
Outboard, Inboard Runabout, Sterndrive
Outboard
Outboard
Sailboats
Sterndrive, Jet Boats
Outboard, Inboard Runabout, Jet Boats
Outboard, Inboard Runabout
Outboard, Sterndrive
Outboard
Sterndrive
Sterndrive, Inboard Cruisers
Sterndrive
Sterndrive
Outboard, Sterndrive
Sterndrive, Inboard Cruisers
Outboard
Outboard, Sterndrive, Canoe
Sterndrive, Inboard Cruisers
Outboard, Sterndrive
Outboard, Sterndrive, Jet Boats
$220,935
$188,977
$241,317
$163,846
$117,661
$122,909
$65,048
$181,781
$70,375
$42,589
$23,993
$141,725
$276,649
$46,380
$37,725
$64,995
$67,359
$71,133
$68,856
$67,594
$60,686
$82,891
$55,983
$40,854
$49,649
$85,771
$78,769
$97,438
$132,144
$47,690
$52,135
$120,145
$41 ,247
$214,446
$96,351
$117,085
$21 1 ,664
$348,848
$535,375
$181,040
$40,449
$144,102
$106,067
$55,787
$178,025
$141,474
$45,472
$46,395
$69
$45
$634
$165
$32
$23
$689
$98
$2
$38
$76
$68
$202
$37
$244
$1
$3,187
$82
$65
$96
$181
$35
$4,236
$140
$294
$61
$833
$64
$49
$68
$93
$71
$110
$21
$130
$97
$167
$116
$343
$90
$20
$46
$292
$8
$27
$179
$169
$45
$3,844
$5,126
$5,126
$2,563
$5,126
$3,844
$5,126
$5,126
$2,563
$6,407
$5,126
$2,563
$6,407
$6,407
$3,844
$5,126
$5,126
$5,126
$6,407
$6,407
$5,126
$5,126
$5,126
$5,126
$6,407
$6,407
$5,126
$6,407
$6,407
$5,126
$5,126
$5,126
$5,126
$6,407
$5,126
$6,407
$6,407
$5,126
$5,126
$6,407
$6,407
$6,407
$5,126
$6,407
$6,407
$5,126
$5,126
$5,126
Chapter 3 Compliance Costs
3-9
-------
Table 3-1: Compliance Cost Per
Facility ID
247
248
249
250
251
252
253
254
255
257
258
260
262
263
265
266
267
270
271
274
275
276
277
1000
2000
4000
5000
6000
7000
11000
13000
3A
3B
4A
4B
4C
116
119
122
123
126
Total
Type of Boat
Outboard
Sterndrive
Outboard, Inboard Runabout
Inboard Runabout
Outboard
Outboard
Inboard Runabout, Sterndrive
Outboard, Sterndrive
Outboard, Sterndrive, Inboard Cruisers
Outboard
Outboard
Inboard Runabout
Inboard Runabout
Inboard Runabout, Inboard Cruisers
Inboard Runabout, Sterndrive
Sterndrive
Inboard Runabout
Sailboats
Sterndrive
Outboard
Outboard, Sterndrive
Outboard
Outboard
Outboard, Sterndrive
Outboard
Outboard, Canoe
Outboard
Outboard
Outboard, Sterndrive, Canoe
Outboard, Sterndrive, Canoe
Outboard
Outboard, Sterndrive, Inboard Cruisers
Outboard, Sterndrive, Inboard Cruisers
Outboard, Inboard Runabout, Sterndrive
Outboard, Inboard Runabout, Sterndrive
Outboard, Inboard Runabout, Sterndrive
Not Included
Ships
PWC Components
RFC Parts
Boat Parts
Shins
Total Variable
Cost
$44,284
$39,395
$172,142
$37,179
$41 ,802
$145,560
$50,624
$267,339
$179,433
$41 ,878
$73,043
$44,182
$136,837
$77,748
$36,558
$62,324
$45,062
$107,107
$84,762
$46,245
$56,166
$159,478
$38,086
$336,492
$1 1 ,639
$6,802
$24,919
$10,051
$1 1 ,639
$12,499
$644,030
$134,753
$51,715
$62,122
$24,025
$23,065
Facility
Total Variable
Cost per Unit
$14
$177
$31
$189
$48
$86
$163
$178
$75
$299
$104
$58
$102
$187
$103
$45
$2,015
$142
$119
$143
$122
$61
$309
$170
$2
$7
$3
$2
$1
$3
$389
$32
$32
$12
$12
$12
Total Fixed Cost
$5,126
$5,126
$5,126
$5,126
$6,407
$6,407
$5,126
$0
$5,126
$6,407
$5,126
$5,126
$5,126
$5,126
$5,126
$6,407
$5,126
$5,126
$5,126
$6,407
$5,126
$5,126
$6,407
$0
$0
$0
$0
$0
$0
$0
$0
$926
$355
$729
$282
$271
in Economic Model
$108,955
$34,773
$125,107
$39,382
$102.542
$13.251.923
#N/A
#N/A
#N/A
#N/A
#N/A
$3,844
$5,126
$5,126
$5,126
$5.126
$544.613
Chapter 3 Compliance Costs
3-10
-------
4. Economic Impacts
4.1 Introduction
The compliance costs outlined in Chapter 3 represent the direct impact of the proposed rule on individual boat
manufacturing facilities that are major sources of HAP emissions. The analysis presented in this chapter estimates
the net social burden of the regulation, taking into account market adjustments to the rule. The social burden
includes the compliance costs but also takes into account other factors, such as the loss consumers incur when boat
prices rise, the loss both consumers and affected producers incur when fewer boats are produced, and increases in
profits for unaffected producers who enjoy higher market prices without any additional costs. This social burden or
cost is weighed by policymakers against the social gains associated with the regulation, including the value of
reduced impacts on human health and the environment, when evaluating regulatory options.
Facility-level compliance costs vary based on characteristics of the boat-producing facilities, such as the amount
and type of resin used. Social costs vary based on characteristics of markets in which these facilities participate.
At the market level, the imposition of compliance costs on some boat producers adds to the cost of producing a
boat, and thus results in an upward shift of the market supply curve. In a perfectly competitive market, the supply
curve measures the marginal cost of supplying boats to the market as a function of the quantity supplied. The area
under the supply curve from 0 to any number, Q, measures the total cost of supplying Q boats. An upward shift in
the supply curve means that it costs more to supply a given quantity of boats. This is what we would expect if
some producers have to switch to lower HAP technologies. The demand for boats measures the quantity of boats
consumers will purchase as a function of the price of boats, assuming all else is held constant. The demand for
boats is unchanged by the regulation. Figure 4-1 below graphically presents the impact of the regulation on the
market for boats. Note that the shift in the supply curve results in an increase in price and a decrease in the
quantity of boats sold.
Figure 4-1. Market Model
D
Chapter 4 Economic Impacts
4-1
-------
The imposition of compliance costs on boat producers results in three types of cost:
»t* Change in Consumer Surplus: Consumer surplus measures the difference between what consumers are
willing to pay and what they actually pay for a product. When the supply curve shifts up and the price of
boats increases, consumer surplus changes by a portion of the externalized cost. The change in consumer
surplus is represented by the area abch in Figure 4-1.
»t* Change in Producer Surplus: Producer surplus measures the difference between what it costs suppliers to
produce the boats they sell and the revenue they receive from selling these boats - their economic profit.
When compliance costs are imposed, some producer surplus is gained if the price received increases, and
some producer surplus is lost because the cost of producing boats also increases as producers internalize
the cost of pollution. Although unaffected producers enjoy a gain in surplus, the loss from producers who
must comply with the regulation outweighs these gains so there is a net loss in producer surplus. The loss
of producer surplus is represented by the areafceg in Figure 4-1.
<• Deadweight loss: The loss in consumer and producer surplus for units that would have been produced
before the regulation but are no longer being produced is called deadweight loss. Notice that the
deadweight loss is comprised of some loss in consumer surplus and some loss in producer surplus. The
deadweight loss is not an additional type of loss but rather is a component of lost consumer and producer
surplus. The deadweight loss is represented as area bed in Figure 4-1.
The total social costs of the regulation can be estimated as the sum of the loss in producer and consumer surplus
(areas abch plusfceg in Figure 4-1) minus whatever surplus is transferred from consumers to producers (area abeh
in Figure 4-1)3. Section 4.2 presents the methodology for translating this theoretical framework into actual models
for calculating the social cost of the boat manufacturing NESFIAP. The results of the social cost analysis are
presented in Section 4.3. The social cost analysis contains information on the effects of the regulation on domestic
producers and consumers and the effect on international trade.
In addition to the social cost analysis, the EIA addresses other issues of concern to policy makers - in particular,
the effects of the rule on employment and on facility closures. Section 4.4 addresses the employment effects of the
regulation, and Section 4.5 addresses facility closures.
4.2 Methodology
An important underlying assumption in the framework for calculating the social cost of a regulation as outlined in
the previous section is that the market for boats is perfectly competitive. In a perfectly competitive market,
homogenous goods are sold at one price. Individual producers cannot affect the price of the product they sell by
strategically altering output. Producers are willing to supply boats to the market as long as the market price is
greater than or equal to their cost of production. It would be difficult to argue that the overall market for boats is
perfectly competitive. Different categories of boats offer very different amenities and sell for a wide range of
prices. Yachts and PWCs, for example, cannot be modeled as a homogeneous good selling for a single market
price.
However, analyzing specific boat sub-markets as competitive markets is more reasonable. We developed models
for six different segments of the boat market: outboard motor boats; inboard runabouts and sterndrive motorboats;
3The EIA focuses on the social costs to U.S. producers and consumers only. As a result, the social
cost is calculated as the change in producer and consumer surplus for U.S. producers and U.S. consumers.
Chapter 4 Economic Impacts 4-2
-------
yachts; personal watercraft and jet boats; sailboats; and canoes. While some product differentiation and price
differentiation still occurs for these product groups, modeling these more homogeneous markets in a perfectly
competitive framework provides a reasonable approximation of likely market adjustments in these markets.
For each market segment, domestic and foreign demand and supply, including the non-regulated portion of domestic
supply, was modeled explicitly. These supply and demand models were then used to estimate changes in market
price and quantity produced and sold, as well as changes in producer and consumer surplus. The remainder of this
section outlines the specific assumptions and calculations required to determine the impact of the regulation on each
market segment. Sections 4.2.1 and 4.2.2 discuss domestic and foreign supply, respectively. Sections 4.2.3 and
4.2.4 discuss domestic and foreign demand. Section 4.2.5 provides the equilibrium conditions that solve the model.
Finally, Section 4.2.6 discusses the calculation of the social cost of the regulation.
4.2.1 Domestic Supply
Not all boat manufacturing facilities in the industry will be impacted by the rule. As a result, there are two groups
of facilities that need to be considered - facilities that will be required to comply with the MACT standards, and
facilities that will not incur costs under the MACT standards.
Facilities that are subject to the MACT standards will incur compliance costs which vary by facility. A given
facility's supply response to increased costs depends on the facility's cost structure, and is measured by its
elasticity of supply. The elasticity of supply measures the percentage change in quantity supplied given a one
percent change in price. Firms with a high elasticity of supply will react more to changing market prices, by
expanding or contracting output, than firms with a low elasticity of supply. For example, an elasticity of supply of
2 means that if the price of the product increases by one percent the firm will increase the quantity supplied by two
percent.
Under the assumption of perfect competition, the change in production at each individual facility can be calculated
as4:
AQijSD=eij*(Qij(/Pjo)*(APj-cij)5 (1)
where
AQijSD = the change in quantity supplied by domestic facility i of product j
e^ = the elasticity of supply (% change in quantity supplied resulting from a 1% change in price) for
product j at facility i
Qlj0 = the baseline quantity of product j supplied by facility i
Pj0 = the baseline price of product j
A?J = the change in price of product j
Cjj = average compliance cost for facility i for product j.
The same equation can be used to model the change in quantity supplied for facilities that do not incur additional
costs under the MACT standards, but for these facilities the compliance cost term (c^) is zero. This equation shows
that the actual change in quantity supplied by each facility is a function of the facility's elasticity of supply, its
baseline production level and price, and its compliance costs.
4Note that we have not assumed a functional form for the supply curve. Because we are interested
in small (marginal) changes around the baseline equilibrium, equation(l)-(2) will hold for any functional
form of the market supply curve that is approximately linear in the neighborhood of the equilibrium.
Chapter 4 Economic Impacts 4-3
-------
For each facility identified as a major source of styrene emissions in TRI, we estimated the number of boats
produced in the baseline (Qlj0). These estimates were calculated by dividing estimated facility-level sales by the
average price for the given boat type (as derived in the Industry Profile, Chapter 2). Appendix A of this document
describes the facility-level sales estimations in detail.
We also have estimates of the total compliance costs for each facility (Q) and assume that these costs are incurred
equally for all boat types produced at the facility (c^ = Cj/Qio). The average price per boat by boat type is used as
an estimate of the baseline market price (Pj0). The elasticity of supply at each individual facility is unknown. The
base case estimates assume that the elasticity of supply for each facility equals the elasticity of supply for the entire
market. Further, in the absence of previous studies of supply responses in the boat manufacturing industry, the
market supply elasticity is assumed to be one. This means that when prices change by one percent, market-level
quantity supplied changes by one percent as well. This assumes that the facility-level marginal supply response is
the same for all facilities in the vicinity of their baseline output. Appendix B presents a sensitivity analysis to
determine how changes in the elasticity assumption affect the total impact of the MACT regulation.
Facilities will have different total output responses because their compliance costs vary. Equation (1) shows that if
the unit compliance costs are greater than the change in price for a given facility, then the facility's quantity
supplied will decrease. If the unit compliance costs are less than the change in price then the facility's quantity
supplied will increase.
Data on non-impacted facilities are not available at the facility level. We therefore model non-impacted facilities as
a single sector. Given the data on the total number of boats produced domestically in Chapter 2 and estimates of
the number of boats produced by affected facilities, we calculate the difference between the total number of
domestically produced boats and the number produced by affected facilities to derive the baseline quantity supplied
by the non-impacted sector. The compliance cost for the non-impacted sector is zero and the elasticity of supply for
this sector is assumed to be one.
4.2.2 Foreign Supply to the U.S. Market
Imports are an important source of competition in certain boat markets and modeling the foreign supply response to
changing market conditions in the United States is necessary to correctly identify the impacts of the MACT
standards. However, we do not have the data required to determine the distribution of impacts across different
foreign producers. As a result, we model foreign supply as a single sector.
The change in foreign supply can be calculated using the following equation:
AQJSF = eJ*(Qj0F/Pj0)*APJ, (2)
where
AQjSF = the change in quantity of product j supplied by foreign firms
6j = the elasticity of foreign supply (% change in quantity supplied resulting from a 1% increase in
price) for product j
Qj0 = the baseline quantity of product j supplied by foreign firms
Pj0 = the baseline price of product j
A?J = the change in price of product j
We have data from the International Trade Commission (ITC) on the total number of imports by boat type (See
Chapter 2). The foreign supply sector is assumed to supply a baseline quantity equal to total imports of boats.
Information on the elasticity of foreign supply was not available, and we therefore assumed that the elasticity of
Chapter 4 Economic Impacts 4-4
-------
supply is one. Again, we conduct a sensitivity analysis to determine the responsiveness of the model results to the
assumption about foreign supply elasticity. This sensitivity analysis is presented in Appendix B.
4.2.3 Domestic Demand
Domestic demand for boats is a function of various factors, such as the price of boats, the income of boat
consumers, and the preferences of boat consumers. We assume that all factors other than price are constant in the
short-run. Under this assumption, the change in quantity demanded resulting from the regulation can be calculated
using the following equation5:
AQJDD=EJD*(QJO/PJO)*APJ (3)
where
AQjDD = the change in quantity demanded by domestic consumers of product j
EjD = the domestic elasticity of demand (% change in quantity demanded resulting from a 1% increase in
price) for product j
Qj0 = the baseline quantity of domestic demand for product j
Pj0 = the baseline price of product j
A?J = the change in price of product j.
The total number of boats sold domestically is the estimated baseline domestic demand (see Chapter 2). The
average price of boats by boat type is used as the baseline market price.
The elasticity of demand represents the percentage change in quantity demanded given a one percent increase in
price. The degree to which firms can pass on cost increases to consumers is determined by the elasticity of demand.
All other things equal, firms that face a more price elastic demand function will be forced to absorb more of the cost
of compliance. Unless demand is perfectly elastic, however, some of the compliance costs will be passed on to
consumers in the form of higher prices. Because the elasticity of demand is negative (the quantity demanded varies
inversely with price), more elastic demand curves have lower (more negative) elasticities.
Elasticity of demand for boats was estimated econometrically in Raboy, 1987. The elasticity of demand for all
boats was estimated to be -1.78. However, the elasticity of demand varies by boat type, ranging from -1.4 for
auxiliary-powered sailboats over 30 ft to -2.17 for inboard runabouts. The elasticity of demand estimates are
given in Table 4-1.
5As with the market supply curve, the demand equations (3)-(4) are valid for any functional form
of the market demand curve that is approximately linear in the neighborhood of the baseline equilibrium for
small changes in price and quantity.
Chapter 4 Economic Impacts 4-5
-------
Table 4-1: Elasticity of Demand Estimates by Boat Type
Outboard boats
Inboard runabouts
Sterndrive boats
Inboard Cruisers
Sailboats, non-powered
Sailboats, auxiliary-powered, less than 30 feet
Sailboats, auxiliary-powered, over 30 feet
All Boats
-2.02
-2.17
-1.90
-1.44
Elasticity estimate not statistically significant
-1.90
-1.40
-1.78
Source: Raboy, David G., 1987. "Results of an Economic Analysis of Proposed Excise Taxes on Boats" mimeo, (Washington, D.C.:
Patton, Boggs and Blow). Prepared for the National Marine Manufacturers Association, Chicago, Illinois.
These elasticity estimates support a grouping of boat types into six boat markets:
<» Outboard boats are modeled separately with an initial elasticity of -2.02.
<» Inboard runabouts and sterndrive boats have similar average (market) prices and similar elasticities of
demand. These boats are widely viewed as substitutes and we model inboard runabouts and sterndrive
motor boats as a single market. The best estimate of the elasticity demand for this product is -2.0.
<» Inboard Cruisers, or yachts, are modeled as a separate product. The best estimate for the elasticity of
demand is -1.44.
»t» While there appear to be differences in the elasticity of demand for different sizes of sailboats, we do not
have baseline price and quantity data for different sizes of sailboats. As a result, all sailboats are modeled
as a homogenous product with a best estimate of the elasticity of demand of-1.65.
Elasticity estimates are not available for the PWCs and jet boats market segment or for the canoe market segment.
Based on qualitative data on the demand for these products, we expect that they will have relatively high price
elasticities. In both market segments we will use an initial elasticity of-2.0.
All six markets are characterized by elastic demand functions (elasticity less than -1). This means for a one percent
increase in price, consumers will purchase two percent less in quantity. An increase in price will cause total
revenue to decrease in the boat manufacturing industry because the increase in price will not offset the decrease in
units sold.
4.2.4 Foreign Demand for U. S. -Produced Boats
The U.S. is a net exporter in most of the boat market segments. Foreign demand for U.S.-produced boats responds
to changes in the regulatory environment in the United States according to the following equation:
AQJDF=E/*(QJOF/PJOF)*APJ (4)
Chapter 4 Economic Impacts
4-6
-------
where
AQjDF = the change in quantity demanded by foreign consumers of product j
E/ = the foreign elasticity of demand (% change in quantity demanded resulting from a 1% increase in
price) for product j
Qj0F = the baseline quantity of foreign demand for product j
Pj0F = the baseline price of product j
A?J = the change in price of product j.
Data on current exports by boat type presented in Chapter 2) are used as the estimate of baseline foreign quantity
demanded (Qj0F). We assume that the boat market is perfectly competitive both domestically and abroad and that
domestic and foreign-produced boats are perfect substitutes. Therefore, the baseline price of domestic boats in the
United States is also the baseline price abroad. We use the average price of boats as an estimate of the baseline
market price. Data on the price elasticities of foreign demand are not available, and we assume these elasticities are
equal to the price elasticities of domestic demand.
4.2.5 Market Equilibrium
In equilibrium, the quantity of boats supplied equals the quantity demanded. Therefore, in changing from the
baseline to the post-compliance equilibrium the change in quantity supplied must equal the change in quantity
demanded.6 Using the equations above this can be stated mathematically as:
(5)
where that i refers to the ith domestic facility and j refers to the jth product. Foreign supply is the supply of
foreign-produced boats to U.S. consumers, and foreign demand is the demand by foreign consumers for U.S.-
produced boats. Because there are six products (i.e., six different boat markets), equation (5) is actually a series of
six equations in six unknowns (the six APj's) which can be solved algebraically.
An Excel spreadsheet model is used to solve these equations. Given the change in compliance costs for affected
firms, the model iterates the change in price (A?J) until all of the equations are solved. The model provides the
following results:
the change in the market price (A?J),
the change in the quantity supplied by each of the affected facilities and by the domestic unaffected sector
(AQySD),
the change in the quantity supplied by the foreign supply sector (AQjSF),
the change in domestic quantity demanded (AQjDD), and
the change in foreign quantity demanded (AQjDF).
4.2.6 Social Cost of the Regulation
The social cost of the regulation is approximated by the net change in producer and consumer surplus in all affected
primary, intermediate and final goods markets. In the case of boats, calculating the social cost would involve
determining not just the impact of the regulation on the producer and consumer surplus in the final markets for
6The analysis does not consider foreign supply to foreign consumers, implicitly assuming that the
foreign market for foreign-produced boats does not affect the foreign market for U.S.-produced boats.
Chapter 4 Economic Impacts 4-7
-------
boats, but the impact on the producer and consumer surplus in the markets for different types of inputs as well. We
do not have data on the spillover impacts that changes in the final market for boats have on input markets.
However, we expect that overall demand for resins will decrease but that the demand for pollution-reducing resins
will increase. Boat manufacturing is not the primary source of demand for resin inputs and we expect the net effect
of the regulation on input markets to be small. Given that the impact on input markets is small, the social cost of
the regulation can be approximated by calculating the change in producer and consumer surplus in the boat markets
alone. Figure 4-1 above depicts the change in surplus graphically.
The social cost of the regulation resulting from changes in one of the six boat markets analyzed can be estimated
using the following series of equations7:
Sq =APSj + ACSj (6)
ijAAPj-Cij)) - 0.5*AQIJ*(APJ-cIJ)] - F;j } (7)
*APJ) (8)
= social cost resulting from changes in the jth market,
= change in producer surplus in the jth market,
ACSj = change in consumer surplus in the jth market,
Qij! = post-compliance quantity supplied by domestic facility i of product j,
AQijS = change in quantity supplied by domestic facility i of product j,
Qj0 = baseline quantity demanded of product j (domestic),
AQjD = change in quantity demanded of product j (domestic),
A?J = change in market price of product j,
Cjj = variable cost of compliance for domestic facility i for product j,
FJJ = fixed cost of compliance for domestic facility i for product j .
The change in social cost is calculated separately for each of the six boat markets and then summed to get the total
change in social costs.8 Appendix C provides the derivation of equations (7) and (8).
4.3 Results
Overall, we expect that the regulation will increase the market price and decrease the equilibrium quantity of boats
sold. Because facilities incur different compliance costs, the impact of the MACT standards will not be uniform
across facilities. Some facilities will incur a larger share of sales losses and some unaffected facilities are expected
Previously we argued that the supply and demand curves can take on any functional form if we
are interested only in small changes around the baseline equilibrium. When calculating the social cost of
the regulation we are inferring information about the total area under the supply and demand curves, not
just the area around the equilibrium point. Thus, we must assume a functional form for the supply and
demand curves. For simplicity, we have assumed linear supply and demand functions.
8If compliance costs fall disproportionately more on the producers of some types of boats than on
others , it is possible that consumers might substitute away to other types of boats. This would shift
demand curves in these markets. We do not have sufficient information to model such shifts in demand
which, in any case, are likely to be very small. We therefore assume that the demand curves in these
markets do not change.
Chapter 4 Economic Impacts 4-8
-------
to see their sales increase. As previously mentioned, the price elasticity of demand in all five boat markets is less
than -1, indicating that overall total revenue will decrease as the price of boats increases. All of these distributional
effects are captured in the models.
The following sections present the results of the market-based economic impact analysis for each of the six boat
markets. A summary table of the predicted effects of the proposed regulation is presented in Section 4.3.7, along
with the estimate of the total social cost of the rule.
4.3.-? Outboard Market
The majority of affected facilities (73 of 125) produce outboard boats. A total of $6.7 million will be spent on
compliance costs by facilities in this sector9. This represents less than one percent of the $1.42 billion dollars in
annual sales of outboard boats.
The costs of complying with the proposed MACT standards are expected to increase the price of an outboard boat
by $10 and decrease the quantity of outboard boats purchased domestically by 589 boats. This represents a 0.1%
increase in price and a 0.3% decrease in domestic sales.
Imports of outboard boats are predicted to increase very slightly (two additional boats) as foreign competitors take
advantage of the fact that they do not incur compliance costs. Exports of outboard boats will decrease slightly (25
fewer boats). The net effect on total domestic production is a decrease of 616 units produced. This decrease is a
0.3% reduction from the baseline quantity of domestically produced outboard boats.
The social cost of the proposed regulation on the outboard market is determined by summing the change in producer
and consumer surplus. The change in producer surplus represents the increase in revenue on units produced post-
compliance, less the total compliance costs paid, less lost profits on units no longer produced. This total for the
outboard market is approximately -$4.6 million (i.e., a decrease in profit of $4.6 million). Of this -$4.6 million, -
$6.7 million is compliance costs and lost profit on units no longer sold and $2.1 million is increased revenue on
units still sold (resulting from higher prices.)
The change in consumer surplus is the welfare loss that results both from the increase in price on outboard boats
and from the decrease in consumption of these boats. The total change in consumer surplus is -$2.0 million for the
outboard boat market. Thus, the total social cost of the regulation on this market segment is $6.6 million.
The total loss in producer surplus caused by the rule is distributed unevenly among domestic producers. Producers
with higher compliance costs tend to have larger losses in producer surplus. However, producers with average
compliance costs but low sales may also have relatively large losses in surplus because they receive less in revenue
increases on the units sold. Non-affected facilities stand to gain from the regulation and some affected facilities
may also gain if their compliance costs are less than the amount they receive in increased revenue resulting from the
price increase. The average annual facility-level loss of producer surplus for affected facilities is -$66,500 for this
industry, but annual losses range from -$610,000 to +$77,900 for affected facilities. In addition, non-affected
facilities as a sector are expected to gain $273,600 annually from the rule.
4.3.2 Inboard Runabouts/Sterndrive Market
9A11 compliance cost estimates are provided using post-compliance (market adjusted) output.
Thus, the total compliance costs may differ from the total presented in the cost analysis presented in
Chapter 3.
Chapter 4 Economic Impacts 4-9
-------
A total of 74 facilities that produce inboard runabouts or sterndrive boats are considered major sources of HAP
emissions. We estimate that these 74 facilities account for 62% of the revenue in this market segment, while
unaffected domestic producers account for the remaining 38%. The 74 affected facilities will spend $4.8 million in
compliance costs under the proposed rule. This represents less than one percent of the $2.4 billion dollars in
baseline annual sales in this sector.
Imposition of compliance costs on a large percentage of the facilities in this market is expected to increase the
weighted average price of runabouts/sterndrives by $17 . This is approximately 0.1% of the baseline weighted
average price of $22,476. The increase in price is also expected to decrease the quantity of runabout/sterndrive
boats purchased domestically by 108 boats (-0.1%). Imports are projected to increase by three boats per year
(0.1%), while exports will decrease by 17 boats per year (-0.1%). The net effect on total domestic production is a
decrease of 125 units produced. This decrease is 0.1% of the baseline quantity of domestically-produced inboard
runabout/sterndrive boats.
The social cost of the proposed regulation on the inboard runabouts/sterndrive market is again determined by
summing the change in producer and consumer surplus. Producer surplus in this market segment decreases by
approximately $3.0 million. Of this total -$3.0 million, -$4.8 million in compliance costs is partially offset by a
$1.9 million increase in revenue from the price increase. Consumer surplus decreases by approximately $1.7
million, resulting in a total social cost of $4.7 million for this market segment.
The total social cost of the rule is not shared equally among affected facilities. The average affected facility has a
loss of producer surplus of-$37,500 but the facility level losses range from -$477,300 to +$30,100. In addition,
the non-affected facilities as a sector are expected to gain $711,600 from the proposed rule.
4.3.3 Inboard Cruiser/Yacht Market
Twenty-seven facilities that produce inboard cruisers and/or yachts are considered major sources of HAPs. These
27 facilities produce 34% of the total units produced domestically in this market. A total of $0.6 million will be
spent on compliance costs by facilities in this sector. These costs are nearly negligible compared to the $1.7 billion
dollars in annual sales of inboard cruisers/yachts.
Given the relatively insignificant compliance burden and the large share of boats produced by non-affected
facilities, the overall market impacts are minimal. The compliance costs are expected to increase the price of a
cruiser/yacht by boats by $35. While this is the largest absolute price increase in any of the six market segments
examined, it is less than 0.1% increase over the average baseline price of $264,937. The effect of the price increase
on the quantity of cruisers/yachts produced domestically, imported and exported is negligible. The model estimated
that there would be one fewer cruiser/yacht produced annually and that there would be no change in imports and
exports.
Producer surplus is expected to decrease by $0.4 million while consumer surplus will decrease by $0.2 million.
Thus, the total social cost of the regulation on this market segment is $0.6 million. The average affected facility
has a loss of producer surplus of-$19,800 but the facility level losses range from -$166,300 to +$2,600. The non-
affected facilities as a sector are expected to gain $149,500 from the proposed rule.
4.3.4 Jet Boats/PWC Market
Only 16 facilities that produce jet boats and/or PWCs were identified as major sources of HAPs. However, these
16 facilities account for 71% of all domestically produced boats in this market segment. As stated in Chapter 2,
Chapter 4 Economic Impacts 4-10
-------
imports of PWCs are significant. Thirty-two percent of all PWCs and jet boats sold in the U.S. are manufactured
abroad.
A total of $506,000 will be spent on compliance costs by facilities in this sector. This total is negligible compared
to the $1.5 billion dollars in annual sales in this sector. The compliance costs do not increase the price of boats by
more than $1, in large part because such a small sector of the market will incur compliance costs.
A total of 28 fewer units will be sold (less than 0.1% reduction). The social cost of the regulation on this market is
$0.3 million, of which $0.2 is a decrease in producer surplus and $0.1 is a decrease in consumer surplus.
The average affected jet boat/PWC facility has a loss of producer surplus of-$14,700, but the facility level losses
range from -$78,600 to -$1,200. In addition, the non-affected domestic facilities as a sector are expected to gain
$174,100 as a result of market adjustments to the proposed rule.
4.3.5 Sailboat Market
There are ten facilities that produce sailboats and are major sources of HAPs. These ten facilities will spend an
estimated $0.7 million in compliance costs. As with most of the other market segments, these costs represent a very
small fraction of the $448 million dollars in estimated annual sales in this sector.
The compliance costs are expected to increase the price of a sailboat by $ 11. This is an increase of less than one
percent over the baseline price of $22,379. The price increase is accompanied by a decrease in domestic sales of
sailboats by 15 boats. Imports of sailboats are expected to rise by roughly three boats, and exports to decline by
six boats. In net, 24 fewer sailboats will be produced domestically. This is a decrease of 0.2% from the baseline
level of domestic production.
Producer surplus is expected to decrease by $0.6 million, consumer surplus will decrease by $0.1 million, and the
total social cost is $0.7 million. The average affected sailboat facility has a loss of producer surplus of-$62,000
but the facility level losses range from -$188,900 to -$22,800. In addition, the non-affected facilities as a sector are
expected to gain $32,600 from the proposed rule.
4.3.6 Canoe Market
There are five U.S. facilities that produce canoes and are major sources of HAPs. These five facilities produce
only an estimated eight percent of domestic production. While the five facilities will incur $94,000 in compliance
costs, these costs have a negligible effect on the overall market. The price of canoes is predicted to increase by less
than one dollar. Producer surplus is expected to decrease by $0.1 million while consumer surplus will decrease by
less than $0.1 million. Thus, the total social cost of the regulation on this market segment is approximately $0.1
million.
The average affected sailboat facility has a loss of producer surplus of-$18,600, and the facility level losses range
from -$46,800 to -$2,200. Non-affected facilities as a sector are expected to gain $23,400 from the proposed rule.
4.3.7 Summary of Economic Impacts
The previous sections describe the impacts of the proposed rule on each of the six boat market segments. These
predicted effects are summarized in Table 4-2 below. The table provides estimates of baseline and post-compliance
price and quantity as well as estimates of the changes in producer and consumer surplus.
Chapter 4 Economic Impacts 4-11
-------
The overall impact of the regulation on each of the boat markets separately are modest. The total cost of the
regulation is less than one percent of total revenue in each of the six market segments. Three of the markets,
namely inboard cruisers/yachts, jet boats/PWCs and canoes, have nearly negligible market-level impacts. This does
not mean that some individual firms within these markets might not be significantly impacted by the regulation, but
these effects are offset by gains at other facilities, so that the domestic producers as a group are not significantly
impacted.
The total social cost of the regulation can be estimated by summing the change in market surplus for all six boat
market segments. The total annual social cost is $13.0 million, of which $8.9 million is lost producer surplus and
$4.1 million is lost consumer surplus. Total revenue for all market segments is $6.8 billion. Thus, the total social
cost of the rule equals 0.2% of total baseline revenue.
Chapter 4 Economic Impacts 4-12
-------
Table 4-2: Summary of Market-Level Economic Impacts of the Proposed MACT Standards
Outboard
Inboard
Runabout/
Sterndrive
Inboard
Cruiser/Yacht
Jet Boats/
PWCs
Sailboats
Canoes
Total-All
Markets
Baseline Market Conditions
Baseline Domestic Demand (# of boats)
Baseline Domestic Production (# of boats)
Baseline Imports (# of boats)
Baseline Exports (# of boats)
Baseline Price
200,000
206,787
1,561
8,348
$7,107
98,100
107,704
3,203
12,807
$22,476
6,300
6,469
340
509
$264,937
187,700
139,625
67,150
19,075
$7,036
14,300
13,240
20,041
5,714
$15,000
103,600
98,814
22,839
18,053
$590
610,000
572,639
115,134
64,533
NA
Post-Compliance Market Adjustment
Change in Domestic Demand (# of boats)
Percentage Change in Domestic Demand
Change in Domestic Production (# of boats)
Percentage Change in Domestic
Production
Change in Imports (# of boats)
Percentage Change in Imports
Change in Exports (# of boats)
Percentage Change in Exports
Change in Price
Percentage Change in Price
(589)
-0.3%
(616)
-0.3%
2
0.1%
(25)
-0.3%
$10
0.1%
(108)
-0.1%
(125)
-0.1%
o
5
0.1%
(17)
-0.1%
$17
0.1%
(1)
0.0%
(1)
0.0%
0
0.0%
0
0.0%
$35
0.0%
(28)
0.0%
(27)
0.0%
7
0.0%
(4)
0.0%
$1
0.0%
(15)
-0.1%
(24)
-0.2%
3
0.0%
(6)
-0.1%
$11
0.1%
(87)
-0.1%
(113)
-0.1%
11
0.0%
(15)
-0.1%
$0
0.1%
(828)
-0.1%
(906)
-0.2%
26
0.0%
(64)
-0.1%
NA
NA
Post-Compliance Welfare Measures
Change in Producer Surplus (Millions $)
Change in Consumer Surplus (Millions $)
Total Social Cost(Millions $)
($4.6)
($2.0)
($6.6)
($3.0)
($1.7)
($4.7)
($0.4)
($0.2)
($0.6)
($0.2)
($0.1)
($0.3)
($0.6)
($0.1)
($0.7)
($0.1)
$0.0
($0.1)
($8.9)
($4.1)
($13.0)
Chapter 4 Economic Impact Analysis
4-13
-------
4.4 Facility Closures and Employment Effects
The social costs of the regulation measure the amount the proposed regulation costs society as a whole. In addition
to assessing the total social burden, EPA is interested in how the costs are distributed. This section investigates
distributional issues by examining facility closures and changes in employment that are expected as a result of the
regulation.
4.4.1 Facility Closures
While the social costs of the proposed regulation are relatively modest, this does not mean that individual facilities
will not experience more substantial impacts. One of the primary limitations of the methodology used to estimate
social costs is that it assumes that each facility has the same elasticity of supply in the neighborhood of the baseline
equilibrium. This implies that, given small price changes, each facility will reduce production at the same rate.
This does not mean that each facility reduces production by the same amount, because a facility's change in
production depends not only on its elasticity of supply but also on its baseline level of production and its
compliance costs (as shown in equation (1)), both of which may vary from one facility to another. However, it does
imply that all firms will reduce production in a smooth and uniform fashion. As a result, the small price changes
predicted by the model do not result in any predicted facility closures. All facilities that incur compliance costs
simply reduce production by some amount. Facilities with higher compliance costs reduce production more, but
never to zero.
In reality, different facilities have different baseline cost structures and will respond to increased compliance costs
and price changes differently. In the absence of information on facility production costs, we had to make
assumptions about producers' supply responses. We examine the impact of altering these assumptions in the
sensitivity analysis presented in Appendix B.
In lieu of determining facility-level closures based on information on facility-level profits and compliance costs, we
use the market level information on total predicted change in quantity to infer the number of facilities that would
shut down if the quantity decrease was born entirely by one (or more) facility. For example, if the market analysis
predicts that 1,000 fewer boats are produced and the average facility produces 500 boats, then the impact is
equivalent to two facility closures.
Table 4-3 presents the total predicted reduction in domestic production, average output per facility, and predicted
boat facility closures for each of the six boat market segments. Note that the predicted reduction in quantity is not
equivalent to even one facility closure in all six markets. While this does not mean that no facilities will close after
implementation of the rule, it does indicate that the rule itself has modest total impacts and that any facility closures
will likely reflect poor relative baseline profitability rather than resulting solely from the compliance burden.
Chapter 4 Economic Impact Analysis 4-14
-------
Table 4-3: Estimated Equivalent Facility Closures by Market Segment
Outboard
Inboard
Runabout/Sterndrive
Inboard Cruiser/Yacht
Jet Boat/PWC
Sailboat
Canoe
Predicted Reduction in
Output
616
125
1
27
24
113
Average Number of Units
Produced Per Facility
2,471
678
82
6,154
1,030
1,590
Equivalent Number of
Facility Closures
0.25
0.18
0.01
0.00
0.02
0.07
4.4.2 Employment Effects
We estimated the employment effects of the MACT standard by using information on the ratio of facility
production to facility employment. For each of the affected facilities, we calculated the ratio of facility-level
employment to facility-level output. The average baseline production/employment ratio was multiplied by the
predicted change in production from the market-level analysis to estimate the total change in employment for each
market segment. The total change in employment is then calculated as the sum of the predicted changes in all six
market segments. These results are presented in Table 4-4 below. The total predicted change in employment is 48
employees. Total employment in this industry is 51,500 (U.S. Department of Commerce, 1992). Thus the
regulation-induced reduction in employment is less than one tenth of one percent from the baseline. Note that this
approach assumes that employment is directly proportional to production. Thus, as production falls we predict
employment will fall. This is not necessarily the case, particularly for small output changes. The employment
changes presented in Table 4-4 should be considered upper bound estimates.
Table 4-4: Estimated Change in Employment by Boat Market Segment
Outboard
Inboard
Runabout/Sterndrive
Inboard Cruiser/Yacht
Jet Boat/PWC
Sailboat
Canoe
Total
Predicted Reduction in
Output
616
125
1
27
24
113
906
Production to
Employment Ratio
26
7
1
26
5
400
NA
Equivalent Reduction in
Employment
24
17
1
1
5
0
48
Chapter 4 Economic Impact Analysis
4-15
-------
5. Firm-Level Analysis
5.1 Introduction
The Regulatory Flexibility Act (RFA) and the Small Business Regulatory Enforcement Fairness Act (SBREFA)
require EPA to prepare a regulatory flexibility analysis for any notice-and-comment rule it issues, unless the agency
certifies that the rule "will not, if promulgated, have a significant economic impact on a substantial number of small
entities." A regulatory flexibility analysis includes:
»t» the number of small entities potentially affected,
»t» information on the compliance costs of the proposed rule,
»t* identification of any federal rules that may duplicate, overlap or conflict with the proposed rule, and
»t* an analysis of any significant regulatory alternatives which accomplish the same objectives and which
minimize any significant economic impact of the proposed rule on small entities.
In addition, SBREFA requires the agency to perform a variety of other tasks to ensure that small entity issues are
being addressed if small business impacts are thought to be of sufficient concern. These additional requirements
include: performing small entity outreach, convening small business advocacy review panels, issuing compliance
guides for small entities, and allowing for Congressional review of the regulation. EPA has prepared guidelines for
implementing the SBREFA and RFA requirements and this chapter was developed in accordance with those
guidelines (EPA, 1997).
The NESFIAP for the Boat Manufacturing Source Category is a notice-and-comment rulemaking subject to
SBREFA and RFA. This chapter evaluates impacts on affected firms in the industry, where an affected firm is the
ultimate legal entity owning an affected facility.
Evaluating impacts on boat manufacturing firms requires three types of information:
»t» The number of small and large firms.
»t» The regulatory costs incurred by small and large firms (calculated as the sum of costs for all facilities
owned by a firm).
»t» A criteria for determining the significance of impacts.
The number of small firms is discussed in Section 2.2 of the Industry Profile ~ Chapter 2. For convenience, these
data are summarized in Section 5.2. Section 5.3 discusses criteria for identifying significant impacts. The impact
of the proposed rule on small and large firms is analyzed in Section 5.4 based on compliance cost-to-revenue ratios.
Section 5.5 presents the conclusions of the analysis and discusses whether the rule presents a "significant economic
impact on a substantial number of small entities."
5.2 Number of Small Firms
The Small Business Administration (SBA) provides small business thresholds by 4-digit SIC code. Boat
Manufacturing is included in SIC 3732-Boat Manufacturing and Repair. The SBA defines "small" for this SIC as
firms with less than 500 employees. EPA found no compelling reason to use an alternative definition of a "small"
firm based on financial profiles or production profiles of boat manufacturing facilities and firms. This analysis
therefore examines the impacts of the proposed rule on firms with fewer than 500 employees and compares these to
Chapter 5 Firm-Level Analysis 5-1
-------
the impacts on firms with more than 500 employees.
As described in Section 2.2, the Statistics of U.S. Businesses (SUSB) was used to determine the total number of
firms engaged in boat manufacture and repair. However, not every firm will be affected by the proposed regulation.
Firms will be required to comply with the proposed rule if they are major sources of hazardous air pollutants
(HAPs). The number of potentially affected firms was determined using data on facility-level styrene emissions
from the Toxic Release Inventory (TRI). Firms owning at least one facility that is a major source of styrene based
on the 1997 TRI data are assumed to be affected by the regulation. There are a total of 78 boat manufacturing
firms that own at least one facility classified as a major source of styrene.
Data from Dun and Bradstreet were used to determine firm-level employment for all affected firms. Of the 78
affected firms, 66 are classified as small firms. Table 5-1 below shows the distribution of boat manufacturing
firms by employment size for both affected and unaffected firms. Note that while there are a large number of small
boat manufacturing firms, only 2.9% of these firms will be affected by the regulation. Alternatively, there are only
21 large boat manufacturing firms, but most (71.4%) of these firms own facilities that are major sources of styrene
and that will be affected by the proposed rule.
Table 5-1: Estimated Number of Boat Manufacturing Firms by Employment Size
Small Firms-SIC 3732
Less Small Firms Specializing in Boat Repair
Total Small Boat Manufacturing Firms (est.)
Large Firms-SIC 3732
Total Boat Manufacturing Firms (est.)
Total Number of
Firms
2,590
283
2,307
21
2,328
Number of
Affected Firms
66
0
66
15
78
Affected Firms
as a Percent of
Total Firms
2.5%
0.0%
2.9%
71.4%
3.4%
5.3 Criteria for Assessing Impacts
Several different measures of "impact" could be used to determine whether there is a "significant economic impact
on a substantial number of small entities". EPA's SBREFA guidance suggests three different measures for
determining the economic impact of a regulation on small firms10. These three measures are:
»t» Annualized compliance costs as a percentage of sales ("Sales Test"),
»t* Debt-financed capital compliance costs relative to current cash flow ("Cash Flow Test"), and
»t» Annualized compliance costs as a percentage of before-tax profits ("Profit Test").
Current EPA guidelines recommend using the sales test for analyzing impacts on small firms (EPA, 1997). The
sales test is also the most appropriate test to use given the nature of compliance costs and the data available for the
10U.S. Environmental Protection Agency, EPA Interim Guidance for Implementing the Small
Business Regulatory Enforcement Fairness Act and Related Provisions of the Regulatory Flexibility Act.,
February 5, 1997.
Chapter 5 Firm-Level Analysis
5-2
-------
boat manufacturing industry11.
For the sales test, the EPA guidelines suggest using one percent and three percent as thresholds for evaluating
impacts (EPA, 1997). We examined industry profit margins to determine the reasonableness of the thresholds
suggested by the EPA guidelines. Dun and Bradstreet (D&B) "Industry Norms and Business Ratios" were used to
determine the financial characteristics of boat manufacturers12. D&B provides data on percentage return on sales,
calculated as net profit after taxes divided by total annual sales. This is an estimate of typical profit margins in the
industry. These ratios are generated using data from 103 boat manufacturing firms. The median return on sales
for the boat building and repair industry (SIC 3732) in 1997 was 3.1%. The upper quartile of the distribution have
profit margins in excess of 6.6% while the lowest quartile have profit margins below 0.9%. We classify firms as
experiencing a significant impact if before-tax compliance costs as a percentage of sales equals the baseline after-
tax profits as a percentage of sales13. Therefore, it appears that three percent is an appropriate upper threshold for
measuring economic impacts for this industry, and that one percent can be considered a moderate impact on firms
in this industry.
Based on its guidelines, EPA can certify that the proposed rule does not have a "significant economic impact on a
substantial number of small entities" if compliance cost-to-sales ratios are less than one percent for all entities. EPA
can also certify the rule if fewer than 100 entities are affected regardless of the level of impact. If more than 100
entities are affected and some entities experience compliance costs in excess of one percent of sales, EPA may still
certify the rule by presenting supporting evidence to the Small Business Advisory Committee. If the rule is not
certified as not having a "significant economic impact on a substantial number of small entities," EPA must
prepare a regulatory flexibility analysis that considers all other significant regulatory alternatives which accomplish
the same objectives and which minimize any significant economic impact of the proposed rule on small entities.
As a caveat, we note that while the boat manufacturing NESHAP may not present a "significant economic impact
on a substantial number of small entities" this conclusion is made using industry level financial thresholds. On
"While profits is the most appropriate basis for assessing impacts in theory, this approach requires
detailed information on firm-level profits. Profit information is typically only available for publically
owned firms. However, most of the small firms affected by this rule are privately owned and do not
provide this information. We therefore rely on the sales test and note that firms with similar compliance
cost-to-sales ratios may experience different levels of impact depending on their baseline costs and
profitability. The cash flow test is most appropriate when capital costs are a substantial portion of the total
compliance costs. As described in Chapter 2, the compliance costs for boat manufacturing are largely
materials costs. Thus, the cash flow test is less relevant in this case.
UD&B Industry Norms and Key Business Ratios 1998-1999. Other sources of financial ratio data
include Leo Troy's Almanac of Business and Industrial Financial Ratios and RMA's Annual Statement
Studies. In both of these sources, data were available for the combined ship and boat building and repair
industries. While the proposed rule will apply to a very small segment of the shipbuilding industry, the
focus of this analysis is on boat manufacturing facilities. In both publications, reported profit ratios for the
combined industries were slightly lower than those reported in Dun and Bradstreet for boat manufacturers.
13There is no simple relationship between before-tax costs as a percent of revenues and impacts on
profitability. Compliance costs are a tax-deductible expense. Therefore, costs equal to three percent of
profits would not result in zero profits for a firm that was earning a three percent profit on sales in the
baseline. The precise impact on after-tax profit rates would depend on the firm's marginal tax rate. For
example, with a 29% marginal tax rate, before tax compliance costs equal to three percent of sales would
reduce after-tax profits from three percent to just below one percent of sales. In addition, to the extent that
some of the compliance costs are recovered in price increases, the impact on after-tax profits would be less
severe.
Chapter 5 Firm-Level Analysis 5-3
-------
average, firms in this industry earn three percent profits, but the lower quartile of firms earn profits of less than one
percent. To the extent that some of the small firms that are major sources of HAPs are in this lower quartile, cost-
to-sales ratios of one percent or less may be significant for individual firms. Without more detailed firm-level
profitability in the baseline, it is not possible to reach more precise conclusions about the impacts of the proposed
rule on small firms.
5.4 Impact of the Proposed Rule on Small Firms
Compliance costs (as are reported in Chapter 3) were estimated at the facility level and then summed for all
facilities owned by the same firm to obtain firm-level compliance costs. Firm-level sales were taken from Dun and
Bradstreet and other publically available data sources, including companies' web pages and SEC filings. These
data were combined to calculate cost-to-sales ratios for each firm.
Table 5-2 presents the number of firms (both small and large) that have compliance cost-to-sales ratios above the
one percent or three percent threshold. Nineteen small firms (30%) were found to incur compliance costs in excess
of one percent of sales. Of these 19 firms, only one firm has costs in excess of three percent of sales. The
following sections first discuss the 18 firms with compliance costs between one and three percent of sales, and then
discuss the one firm with costs exceeding three percent of sales in more detail.
5.4.1 Small Firms With Compliance Costs Between One and Three Percent of Sales
The majority of the 18 firms with ratios between one and three percent have impacts very near or equal to one
percent. Specifically, three firms have compliance costs equal to one percent of their sales. An additional 10 firms
incur costs between 1.1% and 1.5% of sales. Only three firms have compliance costs over two percent of sales.
The 18 small firms with compliance costs between one and three percent of sales share the following features:
<» Firms manufacture a single type of boat. All but three firms make only a single type of boat. The
majority of firms with compliance costs in excess of one percent of sales (11 in total) manufacture
outboard boats. Facilities owned by these firms incur average compliance costs of $81,000 per year -
slightly lower than the $91,000 per facility average cost for the market segment as a whole. However, the
11 firms own facilities that are smaller than the average for the entire market segment, with average
baseline revenues of $4.4 million compared to the average of $17.6 million for all outboard manufacturing
facilities. They therefore receive less total increase in revenue from the predicted $10 per boat price
increase than the average facility (an average of $6,000 each versus a $26,000 average increase for the
segment as a whole). The predominance of outboard boat manufacturers among the 18 small firms
probably reflects the fact that outboard boat production involves primarily hull manufacture, with relatively
few add- on features. Add-on features such as engines (for inboards and jet boats) or furniture (for yachts)
add value to the boat but are not associated with compliance costs under the proposed rule.
»t» Firms own a single facility. Eleven of the 18 firms are single-facility firms. Of the remaining seven firms,
five may be single facility firms but the parent-company employment was not available from Dun and
Bradstreet to confirm this. Only two of the 18 firms are known to be multiple facility firms.
It is also worth noting that while only four of the 78 firms affected by the rule manufacture boat parts or serve as
job shops, three of these four firms have compliance costs in excess of one percent of sales.
Table 5-2: Compliance Cost to Sales Ratios by Firm Employment Size
Chapter 5 Firm-Level Analysis 5-4
-------
Small
Firms
Large
Firms
Total
Total
Firms
2,307
21
2,328
Total
Affected
Firms
63
15
78
Number of
Firms With
Costs in
Excess of
1% of Sales
19
0
19
Percent
of
Affected
Firms
30.2%
0.0%
24.4%
Percent
of Total
Firms
0.8%
0.0%
0.8%
Number of
Firms With
Costs in
Excess of
3% of Sales
1
0
1
Percent of
Affected
Firms
1.6%
0.0%
1.3%
Percent
of Total
Firms
0.0%
<0.1%
<0.1%
Note: Numbers shown are not exclusive. Firms with compliance costs in excess of three percent of sales are also listed as
having costs in excess of one percent of sales.
5.4.2 Firms With Compliance Costs Greater Than Three Percent of Sales
The one firm with costs exceeding three percent of sales is a single-facility firm that makes both outboard boats and
other fiberglass products such as bathtubs and spas. Survey data on total resin consumption were available for this
firm. Data from the survey do not indicate what percentage of the firm's resin usage is associated with the
manufacture of boats. The estimated annualized costs based on total reported resin use are $41,569. This cost
may be overstated if substantial portions of the resin use is not associated with boat manufacturing.
Sales for this firm of $1.1 million were obtained from Dun and Bradstreet. The estimated compliance cost-to-sales
ratio of 3.7% suggests that this firm may experience significant economic impacts if the firm has baseline profits
similar to the industry average for boat manufacturers. A more detailed analysis of the potential impact on this
facility could not be performed because the facility is privately owned and we have no information on firm-level
costs or profits. It is possible that this facility will elect to stop manufacturing boats and switch to exclusively
manufacturing bathtubs and spas as a result of the regulation. This might occur if the bulk of resin use is from
boat manufacturing and if revenue from bathtub/spa manufacture is sufficient to maintain operations14.
5.5 Conclusions
Nineteen small firms that are major sources of HAP emissions, and hence affected by the regulation, are expected
to have compliance costs in excess of one percent of their total sales. This represents 30.2% of all affected small
firms, but only 0.8 percent of the estimated total number of small boat manufacturers. Only one firm is expected to
experience costs in excess of three percent of sales. There is uncertainty regarding the compliance costs estimates
for this firm, which stems from the fact that the firm manufactures bathtubs and spas as well as boats, and no
information was available on the percent of emissions that can be attributed to bathtub/spa manufacture versus boat
manufacture.
Table 3-1 in Chapter 3 shows that capital costs represent only four percent of total compliance costs for all affected
firms (before taking production level adjustments into account.) Most compliance costs are materials costs and are
largely variable with production levels. This suggests that, in general, smaller producers will not incur
disproportionate costs due high fixed compliance expenditures. Some particular small producers may be at a
14EPA is currently developing MACT standards to control emissions from other manufacturers
using reinforced plastics, including bathtub and spa manufacturers. If this sources is subject to the
reinforced plastics MACT, they may incur additional compliance costs associated with that rule.
Chapter 5 Firm-Level Analysis
5-5
-------
disadvantage because they emit more HAPs per boat produced than other producers, or otherwise are farther from
compliance with the proposed requirements in the baseline than other small producers or their larger competitors.
The analysis in this chapter has focused on negative economic impacts. However, less than three percent of the
estimated 2,307 small firms in the industry15 are affected by the rule and the unaffected small firms stand to gain a
competitive advantage from the regulation. These numerous unaffected small firms will experience an increase in
revenue as prices rise but will not incur any compliance cost themselves. Given the small percentage of small firms
expected to incur compliance costs in excess of one percent of sales and given the large number of small firms that
are not major sources and that could gain a competitive advantage from the regulation, it does not appear as if the
proposed NESHAP presents a "significant economic impact on a substantial number of small entities" at the
industry level.
15Only 66 of the 2,307 estimated small boat manufacturing firms are major sources of HAPs.
Chapter 5 Firm-Level Analysis 5-6
-------
References
Boating Industry. 1996. "The Boating Business, 1995 Annual Industry Review." January.
Boating Industry. 1998. "The Boating Business, 1997 Annual Industry Review." January
DeFranco, Liz. 1996. "Sailboat Production Rose Moderately in 1995." Boating Industry, v59, n4, 1996.
DeFranco, Liz and Richard Porter. 1996. "Marine Retailing: A Look into the Future," Boating
Industry, v59, n4, pg43.
Dun and Bradstreet. 1998. Industry Norms and Key Business Ratios.
Encyclopedia of American Industries. 1998. Gale Research Group, Editors, Heil. S and Peck, T.
ITC. 1998. U.S. Domestic Exports and U.S. Imports for Consumption.
Kurowski, Jeff. 1996. "Freedonia Forecasts Industry Sales, PWC Market", Boating Industry, v59, n7.
Manufacturing USA, Fifth Edition, 1996.
National Marine Manufacturers Association. 1995 Boating Industry 1995. Chicago, IL.
National Marine Manufacturers Association. 1996. Boating Industry 1996. Chicago, IL.
National Marine Manufacturers Association. 1997. Boating Industry 1997. Chicago, IL.
Raboy, Dr. David G. 1987. "Results of an Economic Analysis of Proposed Excise Taxes on Boats", mimeo,
Washington D.C.: Patton, Boggs and Blow, prepared for the National Marine Manufacturers Association,
Chicago, IL.
SRI International. 1996. Chemical Economics Handbook, Unsaturated Polyester Resins, April, page 580.1201 F.
The Sailing Company of Miller Sports Group LLC. 1998. 1998 Annual Sailing Business Report.
U.S. Department of Commerce. 1993. International Trade Administration. U.S. Industrial Outlook, 1993,
Washington, DC.
U.S. Department of Commerce. 1994. International Trade Administration. U.S. Industrial Outlook, 1994,
Washington, DC.
U.S. Department of Commerce. 1998. International Trade Administration, U.S. Industry and Trade Outlook
1998, Washington, DC.
U.S. Department of Commerce. 1992. Bureau of the Census. 7992 Census of Manufactures, Industry Series,
MC92-I-37C (including "Ship and Boat Building".)
U.S. Department of Commerce. 1996a. Bureau of the Census. 1996 Annual Survey of Manufacturers.
References R-1
-------
U.S. Department of Commerce. 1996b. Bureau of the Census. County Business Patterns, 1996.
U.S. Department of Commerce. 1996c. Bureau of the Census. Statistical Abstract of the U.S. 1996.
U.S. Department of Commerce. 1996d. Bureau of the Census. Statistics of U.S. Businesses, U.S. Totals for All
Industries, 1996.
U.S. Environmental Protection Agency. 1999. Final Cost Procedures Documentation Memorandum. June 10,
1999.
U.S. Environmental Protection Agency. 1997a. Profile of the U.S. Shipbuilding and Repair Industry. Office of
Compliance Sector Notebook Project. EPA 310-R-97-008, September.
U.S. Environmental Protection Agency. 1997b. EPA Interim Guidance for Implementing the Small Business
Regulatory Enforcement Fairness Act and Related Provisions of the Regulatory Flexibility Act. February
5, 1997.
U.S. Small Business Administration. 1999. Small Business Size Standards Matched to SIC Codes. Downloaded
from SB A website.
References R-2
-------
Appendix A: Facility-level Sales Estimates
A.I Introduction
The economic impact analysis requires as inputs the number of boats produced by type, the price of each boat type,
and sales for each facility. Depending on what information was available for each affected facility, we used
available data to derive missing data at the facility level (e.g., using price and quantity produced to calculate sales
or price and sales to calculate number of boats produced.) In all cases, we classified facilities by type of boat
produced and used data on the average price per boat for different types of boat as the estimate of price. To the
extent that the boats produced by a particular facility are sold at higher or lower prices than the average price
reported for the relevant boat market, facility-level sales will be under- or overstated (or the number of boats
produced will be under- or overstated) by this estimation approach.
Firm-level sales are available for most of the boat manufacturing firms from Dun and Bradstreet (D&B). This
appendix details the assumptions and calculations that were used to estimate sales at the facility level. The process
included classifying facilities by boat type and estimating facility-level sales. Section A.2 describes the data and
estimation procedures used. Section A.3 documents our decision criteria for choosing a sales estimate when more
than one estimate was available for a facility.
A.2 Methods of estimating facility-level sales
Facility-level sales are available for some facilities in D&B, but even when these numbers are available, they are
not always reliable. For example, firm-level sales are reported for many facilities, or the sum of facility-level sales
within one firm is significantly different from firm sales. As a result, we do not rely on facility-level sales from
D&B. Instead a variety of different data sources were used to estimate facility-level sales. This section first
describes the sources of data used and then explains the three different estimation procedures employed.
A. 2.1 Sources of data
The following data sources were employed in the estimation of facility-level sales and classification of facilities by
type of boat produced. None of the data sources contained information on all the boat manufacturing facilities of
interest. Therefore, of the three estimation methods used, only one or two were available for most facilities due to
data limitations.
»t* Survey of selected boat manufacturing facilities: The survey provides information on the number of boats
produced, the average size of boats produced and the number of employees at each facility. Survey data
are available for 47 percent of facilities.
»t* Firm web pages: Web pages, when available, can provide information on the type of boats (outboard,
inboard cruiser, jet boat etc.) produced at each facility. Internet information was available for
approximately 110 facilities.
»t* Firm Security and Exchange Commission (SEC) filings: Publicly traded firms are required to file with the
SEC. These filings can include information on the type of boats produced and firm revenue. SEC filings
were available for seven firms.
»t* National Marine Manufacturers" Association. (NMMA) "Boating 1997": Provides information on the
average price of boats by boat type (outboard, inboard runabouts, etc.)
»t* Dun and Bradstreet: At the firm level, D&B provides information on sales and employment. Employment
figures are available at both the facility- and firm level. As mentioned above, facility-level sales are
available, but are believed to be unreliable.
Appendix A Facility-level Sales Estimates A-1
-------
»t* Census of Manufacturers. 1992: The Census of Manufactures provides information on total value of
shipments and total employment by facility employment-size range at the four digit SIC code level. The
data for SIC 3732 "Boat Manufacturing and Repair" were used in this analysis.
»t* Annual Survey of Manufacturers. 1996: The Annual Survey of Manufacturers provides value of
shipments and total employment information on a more frequent basis than the Census of Manufacturers.
However, the Annual Survey does not provide these figures by different employment ranges. Again, data
for SIC 3732 "Boat Manufacturing and Repair" were used.
A 2.2 Three estimations of facility-level sales
This section describes three different approaches that were used to estimate sales at the facility level. Where more
than one method could be used for a particular facility, the estimates were compared and a single estimate was
selected using decision criteria described in the next section. It should be noted that all of the methods used are
subject to uncertainty, and the estimate selected for any single facility may be either over- or understated. The use
of multiple methods wherever possible should prevent significant errors in the estimates, however.
(a) Using the number, type and price of boats sold
The survey provided data on the number of boats produced for 47 percent of the affected facilities. Web sites and
SEC filings were used to determine the type of boat manufactured at each facility. If the facility produced only one
type of boat, then the estimate of facility sales was simply the number of boats multiplied by the average price for
that boat type16.
The calculations were more complex if information from the survey, web-pages, or SEC filings indicated that the
facility or firm made more than one type of boat. Unfortunately we do not have information on the number of boats
of different types produced at each facility. Instead we have the total number of boats produced and qualitative
information on the types of boats produced. In order to complete the calculation we needed to determine the
average price of all boats produced at the facility. A simple average of the prices of all boats manufactured was
believed to be misleading because it assumes that facilities produce the same number of different types of boats.
Instead of using a simple average, we used industry level sales data to calculate a weighted average price. The
price of each type of boat produced at the facility is weighted by the ratio of the number of boats of that type
produced industry-wide to the total number of boats produced of all types. Instead of assuming that each facility
divides production evenly between the boat types it produces, this method assumes that each facility produces
different boats in the same ratio as the industry as a whole. The weighted average price was then multiplied by the
total number of boats produced to obtain an estimate of facility sales.
The average price of boats was taken from the 1997 NMMA report and no updating of these dollar values was
necessary.
(b) Using firm level sales and the ratio of facility-to-firm employment from D&B
As previously mentioned, D&B provides data on sales and employment at the firm level and data on employment at
the facility level. The second estimation method assumes that, within each firm, facility sales are proportional to
facility employment. Using this assumption, facility-level sales can be calculated as firm-level sales multiplied by
the ratio of facility employment to firm employment. This method is most accurate when the firm is relatively
16Price information from the NMMA reflects the average retail price of boats sold. Boat
manufacturers receive the wholesale price, and using the retail price may therefore overstate total sales for
the facility to an unknown extent.
Appendix A Facility-level Sales Estimates A-2
-------
homogenous. If the firm manufactures a wide variety of products, then the assumption that sales are proportional
to employement is more suspect.
The D&B data are updated at least once every two years for each firm. As a result, the dollar values are assumed
to be current and no updating of these numbers was performed.
(c) Using value of shipments and the ratio of facility employment to total employment by range from the
Census of Manufacturers (employment data from D&B)
The third estimate of facility-level sales relies on information from the Census of Manufacturers. The Census of
Manufacturers is conducted every five years and establishment (facility) data are reported at the four-digit SIC
code level. Data for SIC 3732 "Boat Manufacturing and Repair" were used for this analysis. Data on the value of
shipments and total employment are reported by establishment employment range. For example, data are available
for facilities with employment ranging from 100-500 employees.
The most recent Census of Manufacturers was conducted in 1992, making the value of shipments data incompatible
with the more recent D&B data. The Annual Survey of Manufacturers was last conducted in 1996 and provides
value of shipment and employment data for the boat manufacturing SIC code, but not by establishment employment
range. We updated the 1992 values by multiplying total value of shipments from the 1996 Annual Survey of
Manufacturers by the ratio of employment range value of shipments to total value of shipments from the 1992
Census. This calculation implicitly assumes that the percentage of the total value of shipments and total
employment attributed to each employment range did not change between 1992 and 1996.
Facility-level sales are extrapolated from the updated value of shipments and employment numbers by employment
range. Each facility was first assigned to an employment range based on the facility employment data from D&B.
For example, a facility with 150 employees is assigned to the employment range "100-500 employees." The total
value of shipments for that employment range is then multiplied by the ratio of facility employment to the total
number of employees for all establishment in the employment range, to estimate facility sales.
As with the D&B estimate described above, this method makes an assumption about the proportionality of sales to
employment. In this estimation, we assume that sales are proportional to employment within an employment size
range. This may not be true if facilities in the same employment class produce different types of boats or conduct
different activities (e.g., boat repair versus boat manufacturing).
3. Selecting facility level sales
Not every facility had enough data to calculate facility sales using all three methods. Where only one method was
feasible, that estimate of sales was used. However, data were available to estimate sales using at least two of the
methods for many facilities. Specific decision rules were used to choose systematically among sales estimates for
facilities with multiple estimates. In developing these decision criteria we were concerned with being as consistent
as possible across facilities. The decision rules are given below.
»t* Where facility employment equals firm employment in D&B: In this case, we assumed that the firm owns
only the one facility. For these facilities, we used the D&B firm-level sales as the facility-level sales value
as well.
<» Where facility employment does not equal firm employment and both D&B and Census estimates are
available: We always chose the D&B estimate if there was one available, recognizing the diversity of SIC
codes and the fact that the D&B data are at least reported at the firm level rather than the SIC/employee
size category level.
»t* Where D&B employment data are available but not sales data: The average per-facility value of shipments
Appendix A Facility-level Sales Estimates A-3
-------
was taken from the Census for the relevant facility employment-size category.
<» Where no facility employment estimate is available: An estimate based on the number of boats produced
reported in the survey and the average price of the relevant boat type was used.
D&B data were not used for five of the affected companies. Three out of the five had no D&B information on sales
and employment. For two of these companies, sales estimates were obtained from different sources including a
phone call to the facility and Manufacturing USA (Fifth Edition, 1996). For the third company no sales estimate
could be obtained and we assumed sales at this company were equal to the average sales for all affected small
businesses. D&B data were not used for the other two companies because a more accurate ultimate sales estimate
could be obtained elsewhere. These two companies are large and have many divisions that do not specialize in boat
manufacturing. For these companies, a 10-K filing from the SEC and/or website information was used to obtain
sales and employment data for their marine segment only.
As a check on the reasonableness of our sales estimates, we used the survey data to calculate an "implied" average
price of boats produced at each facility by dividing the facility sales estimate by the number of boats produced.
These implied prices are generally higher than the average retail price of boats reported by the NMMA. There are
several potential explanations for this discrepancy, including:
»t* Major sources may produce higher-end boats than the average facility in the same employment size
category;
<» The assumption of a consistent relationship between employment and number of boats produced may be
inaccurate; and
»t» The assumed mix of boats at each facility may be inaccurate.
As a second check on the reasonableness of the facility sales estimates, we summed sales for all facilities in the
same firm and compared these values to firm-level sales in D&B. The sum of estimated facility sales exceeded
firm-level sales for only one facility. In addition, we compared the total sales at all facilities to total sales for the
boat manufacturing industry. The total sales for all facilities in the analysis is approximately half of the total sales
for the boat manufacturing industry as a whole.
Appendix A Facility-level Sales Estimates A-4
-------
Appendix B: Sensitivity Analysis
B.1 Overview
One of the key assumptions made in the Economic Impact Analysis (EIA) results presented in Chapter 4 is that the
market elasticity of supply (both foreign and domestic) is equal to one for all six boat markets. In addition the
facility-level elasticity of supply is assumed to be the same for all firms and equal to the market elasticity of supply.
We tested the sensitivity of the model results to changes in the assumed market-level supply elasticity. In order to
test the sensitivity of market-level results to changes in the elasticity of supply, we held all other inputs to the model
constant. We examined how two key indicators for each market-the change in price and the total social costs-vary
over the range of elasticity of supply values between zero and two. This appendix describes the results of those
tests for each of the six boat market segments.
In all six boat markets the change in equilibrium price varies positively with the elasticity of supply. For a given
demand function and a given average compliance cost, the upward shift of a supply function induced by these
compliance costs will result in a greater increase in the equilibrium price the greater the price elasticity of supply.
In four of the six boat markets the total social cost decreases as the price elasticity of supply increases. In two
markets, jet boats/PWCs and sailboats, the total social cost increases as the price elasticity of supply increases.
Although the greater increase in price creates greater losses in consumer surplus, most of these losses in consumer
surplus are simply transfers to boat producers. Consumers pay a higher price, but producers receive a higher price.
Thus these losses in consumer surplus are largely offset by equal gains in producer surplus. In the jet boats/PWCs
and sailboats markets, however, import competition is substantial. When the price elasticity of supply rises and the
increase in equilibrium price rises, a larger share of these gains goes to foreign producers while the compliance
costs are borne solely by domestic producers. Because gains to foreign producers are not included in the
calculation of social costs, the total social cost rises with the elasticity of supply in these two markets.
In the analysis presented in Chapter 4 we assumed an elasticity of supply equal to one in all markets, which resulted
in an estimate of total social cost for the proposed regulation of $13.0 million. If we assume that the elasticity of
supply takes the value between zero and two that maximizes the total social cost in each market, the total social
costs of the proposed rule is $13.3 million. This cost is 0.2 percent of the $6.8 billion in total revenue for all
market segments, and is only 2.3 percent higher than the total social cost estimated in the base case.
Appendix B Sensitivity Analysis B-1
-------
B2. Outboard Market
With a facility-level elasticity of
supply equal to one for all domestic
facilities and foreign suppliers, the
predicted change in price for
outboards was $10. The total
estimated social costs of the
regulation in this market was $6.64
million. The change in price
increases as the elasticity of supply
increases. Over the range of
elasticities between zero and two, the
expected change in price ranges from
$3 to $16. The social costs decreases
as the supply elasticity increases. The
total social costs ranges from $6.74 to
$6.55 million.
B3. Inboard
Runabout/Sterndrive Market
Sensitivity Of Outboard Model to Changes in Elasticity of Supply Values
6,450
1 1.2
Elasticity of Supply
With a facility-level elasticity of supply equal to one for all domestic facilities and foreign suppliers, the predicted
change in price for inboard runabouts/sterndrives was $17. The total estimated social costs of the regulation in this
market was $4.65 million. Over the
range of elasticities between zero and
two, the expected change in price ranges
from $5 to $24. Over the same range in
elasticities, the total social costs ranges
from $4.79 to $4.56 million.
Sensitivity of Inboard Runabout/Sterndrive Model to Elasticity of Supply
1 1.2
Elasticity of Supply
Appendix B Sensitivity Analysis
B-2
-------
B4. Inboard Cruiser/Yachts Model
With a facility-level elasticity of supply
equal to one the predicted change in price
for inboard cruisers/yachts was $35 and
the total estimated social costs is
$608,000. Over the range of elasticities
between zero and two, the expected
change in price ranges from $11 to $50.
The total social costs ranges from
$616,000 to $602,000.
Sensitivity of Inboard Cruiser/Yacht Model to Elasticity of Supply
0.8 1 1.2 1.4
Elasticity of Supply
B5. Jet Boats/PWC Model
In the baseline scenario, with elasticity
of supply equal to one for all domestic
facilities and foreign suppliers, the
predicted change in price for jet
boats/PWCs was $0.70. The total
estimated social costs of the regulation in
this market was $338,000. Over the
range of elasticities between zero and
two, the expected change in price ranges
from $0.23 to $0.94. The social costs
also increases as the supply elasticity
increases, ranging from $317,000 to
$348,000.
Sensitivity of Jet Boat/PWC Market to Elasticity of Supply
1 1.2
Elasticity of Supply
Appendix B Sensitivity Analysis
B-3
-------
B6. Sailboat Model
The baseline predicted change in price for
sailboats was $1 land the total estimated
social costs of the regulation in this market
was $745,000. Over the range of
elasticities between zero and two, the
expected change in price ranges from $3 to
$17. The total social costs ranges from
$738,000 to $750,000.
Sensitivity of Sailboat Model to Elasticity of Supply
B. 7 Canoe Model
The predicted change in price for
canoes was $0.26 and the total
estimated social costs was $96,000.
Over the range of elasticities between
zero and two, the expected change in
price ranges from $0.07 to $0.39.
The total social costs ranges from
$97,000 to $95,000, over the same
elasticity range.
i 10--
o. 0.25 --
=
0.2 0.4 0.6 0.8
1.2 1.4 1.6 1.8
Elasticity of Supply
Sensitivity of Canoe Model to Elasticity of Supply
96 g
0.2 0.4
0.6 0.8 1 1.2 1.4 1.f
Elasticity of Supply
Appendix B Sensitivity Analysis
B-4
-------
Appendix C: Social Cost Equations
The change in social costs is estimated as the sum of the changes in producer and consumer
surplus for domestic consumers and domestic producers only. The equations for estimating
the change in producer and consumer surplus given linear demand curves (equations (7) and
(8) in Chapter 4) are as follows:
where
sc
APS
ACS
Qo
AQ
AP
=L{ [(Qil*(AP-ci)) - 0.5*AQI*(AP-cI)] -
), (8)
social cost resulting from changes in the market,
change in producer surplus,
change in consumer surplus,
post-compliance quantity supplied by domestic facility i,
change in quantity supplied by domestic facility i,
baseline quantity demanded of (domestic),
change in quantity demanded of (domestic),
change in market price,
variable cost of compliance for domestic facility i,
fixed cost of compliance for domestic facility i.
(7)
This appendix provides the derivation of these equations. For simplicity we focus on calculating the change in
surplus for a single product and therefore drop the j subscripts that are associated with the six boat types.
Figure C-l provides a graphical representation of the changes in surplus and is used for reference in the sections
that follow.
Figure C-l
Q> Q
Appendix C: Social Cost Equations
C-1
-------
C.1 Change in Producer Surplus
Producer surplus measures the difference between what it costs suppliers to produce the boats they sell and the
revenue they receive from selling these boats - their economic profit. The pre-compliance producer surplus is
represented by the area abP0 in Figure C-l, while the post-compliance producer surplus is represented by the area
The change in producer surplus consists of three distinct parts:
<» Incremental increase in revenue on units produced post-compliance. Graphically this is the area
PjPgec in Figure C-l. Mathematically this area can be estimated using the following equation:
EQn*(Pi-Po) or
E Qu * AP
»J» Compliance costs paid on units produced post-compliance. This value is represented as the area adcfm
Figure C-l plus the fixed costs of compliance which are not shown in the graph. Mathematically this area
can be estimated using the equation:
<» Lost profit on units no longer produced. Graphically the area dbe in Figure C-l represents the profit
producers lose because the units Q0 minus Qj are no longer produced. Note that the line segment dc equals
the average compliance costs (q) while the line segment ce represents the change in price (AP). Thus, the
height of the triangle we are interested in is given by the line segment de which can be calculated as AP - c;.
Mathematically the lost profit can be estimated as:
£ 0.5 * AQ * (AP - Cj)
Adding all of these components together results in equation (7):
APS =£,{ [(Qu^AP-q)) - 0.5*AQi*(AP-ci)] - F, }
C.2 Change in Consumer Surplus
Consumer surplus measures the difference between what consumers are willing to pay and what they actually pay
for a product. The pre-compliance consumer surplus is represented by the area gbP0, while the post-compliance
consumer surplus is represented by the areagcPj. The change in consumer surplus is therefore represented by the
area.PjPgbc. This change has two components.
<» Transfer of surplus from consumers to producers. The area PjP
-------
-0.5 * AP * AQ
Adding the two components of the change in consumer surplus yields equation (8):
ACS = -((VAP + 0.5*AQD*AP).
Appendix C: Social Cost Equations C-3
------- |