Chapter 13
Economics of
Pollution Control: An
Overview
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
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
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-2
Negative Externality
• Marginal Private Costs < Marginal Social Costs
Ideal
Actual
Pi
Pa
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-3
Economics and Pollution Control
The Two Big Questions
1. What is the optimal level of pollution?
2. How should it be allocated among its
sources (firms)?
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-4
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.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-5
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)
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-6
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
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-7
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%
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-8
What Does the Cost Curve Look Like?
Cost of Reducing Pollution
500
Total Costs
400
300
200
100
0
% of Emissions Reduced
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-9
How About the Costs of Damages
• Similarly
Marginal (additional) damage increases with an
increase in the total amount of pollution
Health Costs of Pollution
500
Total Costs
400
300
200
100
0
Amount of Pollution
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-10
Determining the Optimal
Amount of Pollution
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-11
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
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-12
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
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-13
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-andcontrol.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-14
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.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-15
FIGURE 15.4 Cost-Minimizing Control
of Pollution with an Emission Charge
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-16
FIGURE 15.5 Cost Savings from
Technological Change: Charges versus
Standards
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-17
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.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-18
FIGURE 15.6 Cost-Effectiveness and
the Emission Permit System
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-19
FIGURE 15.3 Cost-Effective Allocation
of a Uniformly Mixed Pollutant
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
15-20
