Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 13 Economics of Pollution...

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Chapter 13

Economics of Pollution Control: An Overview

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 15-2

Why Is There Pollution?

• Pollution is a by-product of the production process Treated as a zero-priced input

• Dispose of waste for free Otherwise have to purchase abatement equipment

• Since price = 0 => consume to the point: MV = 0 However MC ≠ 0

• So have a deadweight loss due to MV < MC


Negative Externality

• Marginal Private Costs < Marginal Social Costs

Ideal

Actual

Pa

Pi


Economics and Pollution ControlThe Two Big Questions

1. What is the optimal level of pollution?

2. How should it be allocated among its sources (firms)?


A Pollutant Taxonomy

• The ability of the environment to absorb pollutants is called its absorptive capacity.

• Stock pollutants are pollutants for which the environment has little or no absorptive capacity.

• Fund pollutants are pollutants for which the environment has some absorptive capacity.

• Local pollutants cause damage near the source of emissions while regional pollutants cause damage at greater distances.


For Today

• Focus on Fund pollutants

• Emission rate is low enough to be absorbed by the environment

No consequences for future generation

• Need only address static efficiency Don’t need 2-period model (yet)

Local pollutant

• Effects are mostly contained within the local environment

E.g., I-5 corridor (Puget Sound air basin)


What Do We Need for Efficiency?

• Economic efficiency requires Minimize the costs of

1. Damages caused by pollution

2. Costs of reducing pollution At the margin (or at the optimum)

• Marginal (additional) costs of reducing pollution (pollution abatement costs) = marginal damages caused by incremental change in emissions

Alternatively

• Maximize the benefits (derived from goods produced)

• While minimizing abatement and damage costs

• Yields same solution


What Do We Know About the Costs of Reducing Pollution?

• Costs of reducing Additional costs of reducing pollution will be

greater when level of pollution is higher Titenberg’s example

• First electrostatic precipitator reduces emissions by 80%

• Second (added) EP by another 80% Effectively 80% x 20% (remaining) = 16%

• Third EP 80% x 4% = 3%


What Does the Cost Curve Look Like?

Cost of Reducing Pollution

0

100

200

300

400

500

% of Emissions Reduced

To

tal

Co

sts


How About the Costs of Damages

• Similarly Marginal (additional) damage increases with an

increase in the total amount of pollution

Health Costs of Pollution

0

100

200

300

400

500

Amount of Pollution

To

tal

Co

sts


Determining the Optimal Amount of Pollution


Optimal Level of Pollution

• Occurs where Marginal damage costs = marginal abatement

costs

• Some simplifications that we’ve made Optimum can vary

• Each firm will have different abatement costs

• Not all geographic area have same damage costs More densely populated areas likely to have higher

damage costs Differences in absorbing capacity of different

geographic areas


How Do We Get There?

• Standards (command and control) Set the overall standard at Q* Calculate the amount of reduction necessary Set uniform reduction goal for all firms

• Taxes/Emission Charges Set the tax = externality cost at the optimum Q* Firms will internalize the cost

• Tradable Permits (Coase) Allocate right to pollute (Q*/N) Allow firms to set price for trading permits


Cost-Effective Pollution Control Policies

Emission Standards An emission standard is a legal limit on the

amount of the pollutant an individual source is allowed to emit.

This approach is referred to as command-and-control.


Emissions charges An emission charge is a per-unit of pollutant fee,

collected by the government. Charges are economic incentives. Each firm will independently reduce emissions until

its marginal control cost equals the emission charge. This yields a cost-effective allocation

A difficulty with this approach is determining how high the charge should be set in order to ensure that the resulting emission reduction is at the desired level.


FIGURE 15.4 Cost-Minimizing Control of Pollution with an Emission Charge


FIGURE 15.5 Cost Savings from Technological Change: Charges versus Standards


Emissions Trading• All sources are allocated allowances to emit either

on the basis of some criterion or by auctioning. The allowances are freely transferable.

• The equilibrium price will be the price at which the marginal control costs are equal for both (or across all) firms.

• The market equilibrium for an emission allowance system is the cost-effective allocation.


FIGURE 15.6 Cost-Effectiveness and the Emission Permit System


FIGURE 15.3 Cost-Effective Allocation of a Uniformly Mixed Pollutant

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 13 Economics of Pollution...

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