Matthew O’Keefe presenting, "Firm Boundaries and External Costs in Shale Gas Production". 

Abstract: Wastewater reuse in the shale gas industry reduces firms’ private costs and mitigates many of the local environmental harms associated with fracking. Most reuse occurs within the firm boundary, but rival operators often exchange (or “share”) wastewater prior to reuse. I analyze how firms choose between internal reuse and sharing in Pennsylvania. To do so, I build a market-level model of wastewater management in which the extent of the sharing market is determined endogenously by firms’ make-vs-buy decisions. Estimating the model, I find that transaction costs associated with sharing are large — approximately $6 per barrel on average — but heterogeneous. Variation in the estimates reveals several channels for potential policy interventions to improve sharing markets. However, increased sharing may be undesirable: because firms’ operations are clustered geographically, internal reuse typically reduces transportation-related external costs. Pigouvian interventions that simultaneously address sharing market imperfections and environmental externalities can worsen local environmental harms.