ABSTRACT
This chapter considers the regulatory response to hydraulic fracturing, including from both an economic and non-economic perspective. The contrast between individual rationality and unintended social outcomes is illustrated by the pumping race to capture oil and gas from a reservoir jointly accessed by two or more individuals. Pennsylvania is a critical case because it has seen a dramatic increase in shale production since the shale era began. In 2008, the Pennsylvania Department of Environmental Protection convened leaders of the state’s regulatory agencies to begin to consider how to regulate fracking. The impact fee is tied to local problems caused by hydraulic fracturing, while severance taxes are not necessarily tied to externalities associated with fracking. The challenge for public policy is that there are many ways to design a mechanism to extract the scarcity rents. Politicians adapted to the challenges of fracking with legislation that was tailored to challenges of shale gas development.
