Eco 101, Introduction to Macroeconomics
Fall 2014
Prof. Michael Dohan
HWK 3: Benefit-Cost Analysis of Air Pollution Control in Beijing, China
BACKGROUND: Beijing, China has one of the highest levels of air pollution of any major city in the world, so
high that some diplomats refuse to be posted to this beautiful capital of China. The Chinese leadership has
decided that they are committed to spending as much as a trillion dollar on a crash program to reduced air
pollution in Beijing and Shanghai, the second largest commercial city in China. The pollution comes mostly
from burning coal and oil to generate electricity to heat or cool buildings, burning coal and oil to power
factories and offices and using gasoline and diesel in the cars, trucks, motorized bicycles, etc.
To keep the problem simple, let us assume that the Chinese government is only concerned about health
benefits which not only affect the inhabitants, increases health care costs, and reduces tourism but also
lowers the productivity of the laborers in the factories, transport, and stores. After some careful economic
research and engineering estimates along with meteorologists and engineers in each city, the experts come
up with the following costs and benefits (total for each city) in the table on page two
Policy Decisions and MB> or = to MC.
The basic principle of cost benefit analysis, ceteris paribus, is to spend resources on
reducing air pollutant as long as the marginal benefits from one more unit (dollar, yuan) is
greater than the marginal costs (assuming that the total benefits are greater than the total
cost
You have been brought in by the World Environment Congress at the invitation of China, Your objective is to
spend your resources so that the last yuan spent in each city yields the greatest benefits for its inhabitants and
workers by controlling pollutants, especially the particulate smaller than 2.5 mm as well as sulfur dioxide
(Sox). Nitrous Oxides (NOx) and hydrocarbons, all when heated in the sun, produces smog and eye-burning
ozone.
Your Problem Beijing and Shanghai, however, are different and require different policies.
Beijing has lots of power plants, traffic and factories and the air is often stagnant over the capital
region. And it has more pollution to start with. So the ambient air pollution is high enough to cause a large
number of excess deaths per year
Shanghai has as much pollution from power plant sources and automobiles and heating as Beijing and
they experience some health problems too. But the climate in Shanghai dissipates the pollutions from the air
more quickly so that in general it has a lot less than pollution than Beijing (but a lot more the New York City).
Questions Using the table on the next page.
1. On the same graph, plot the marginal cost of controlling each “level” of air pollution and the marginal
benefit received from controlling each level of air pollution in the Beijing region. Show on the graph the
optimal level and explain it in words. On a second small graph, do the same thing for Shanghai.
2. What is the optimal level of air pollution control in Beijing. Why don’t we want “clean” air? Should we at
this point in time control any air pollution in Shanghai? Why or why not? Explain in words.
HWK 3: Benefit-Cost Analysis of Air Pollution Control in Beijing, China
Table I
Example of Optimal Air Pollution Control Policy
Using two Cities in China
Data are representative of the actual situation and selected to mke the problem more challenging.
Marginal
Emission
Total
Emission of Fine Particles
Total
Marginal Benefit
Control
of Fine
benefit
Cost
of
cost
of
< 2.5 mm
Policy
Particles
of
of
attaining attaining
In
the
Shanghai
Region
Where the < 2.5 mm attaining
attaining
each
each
MC of
each
each
Marginal Marginal
level of
level of
controlling Beijinglevel of
level of
Cost of
Benefit
Tianjincontrol
control
the last
control
control Level of attaining attaining
Hebei
in
in
ton from
in
in
Fine
each level
each
Beijing
Beijing
Region
each
Beijing
Beijing Particles of control level of
region
region
source is 1,000,000
region
region
< 2.5
in 10
control
equalized
tons
10
10
mm
billion
in 10
10
10
for each
billion
billion
yuan
billion
billion
billion
level.
yuan
yuan
yuan
yuan
yuan
5
I
10
1
1
4
4
11
10
II
9
3
2
6
2
3
5
4
III
8
6
3
9
3
2
6
0
IV
7
9
3
12
4
1
7
0
V
6
14
5
14
2
VI
5
20
6
15
1
VII
4
30
10
15
NA
VIII
3
45
15
15
NA
IX
2
65
20
15
NA