Economics of Pollution Control: An Overview Chapter 14 Economics of Pollution Control: An Overview

14.1 Introduction Main contents: Lay the foundation for understanding the policy approach to controlling the flow of waste products by developing a general framework for analyzing pollution control. Define efficient and cost-effective allocations for a variety of pollutant types. Compare the efficient and cost-effective allocations to market allocations. Demonstrate how efficiency and cost-effectiveness can be used to formulate desirable policy responses.

14.2 A Pollutant Taxonomy According to the absorptive capacity of the environment, the pollutants can be classified as follows: Stock pollutants, which the environment has little or no absorptive capacity. Found pollutants, which the environment has some absorptive capacity.

14.2 A Pollutant Taxonomy Pollutants can also be classified by their zone of influence, defined both horizontally and vertically. The horizontal dimension deals with the domain over which damage from an emitted pollutant is experienced. Local pollutants Regional pollutants The vertical zone of influence describes whether the damage is caused mainly by ground-level concentrations of an air pollutant or by concentrations in the upper atmosphere. surface pollutant Global pollutant

14.3 Defining Efficient Allocation of Pollution 14.3.1 Stock Pollutants 14.3.2 Fund Pollutants

14.3.1 Stock Pollutants The efficient allocation of a stock pollutant must take into account the fact that the pollutant accumulates in the environment over time and that the damage caused by its presence increases and persists as the pollutant accumulates.

14.3.1 Stock Pollutants Suppose: consider the allocation of a commodity which we refers to as X. The production of X involves the generation of a proportional amount of a stock pollutant. The damage caused by the presence of this pollutant in the environment is further assumed to be proportional to the size of the accumulated stock.

14.3.1 Stock Pollutants The efficient allocation is the one which maximizes the present value of the net benefit. In this case the net benefit at any point in time t is equal to the benefit received from the consumption of X minus the cost of the damage caused by the presence of the stock pollutant in the environment.

14.3.1 Stock Pollutants Efficient allocation of stock pollutants: The damage cost rises with the cumulative amount deposited in the environment. The efficient quantity of X would decline over time as the marginal cost of the damage rises. The price of X would rise over time, reflecting the rising social cost of production. the amount of resources committed to controlling the pollutant would increase over time. Ultimately, a steady state would be reached where additions to the amount of the pollutant in the environment would cease and the size of the stock would stabilize.

14.3.1 Stock Pollutants Technological progress could modify this efficient allocation. The marginal damage cost associated with a given level of production of X would lower. More of X could be produced with technological progress than without it.

14.3.2 Fund Pollutants The efficient allocation of fund pollutants is represented by the point at which the damage caused by the marginal unit of pollution is exactly equal to the marginal cost of avoiding it.

Figure 15.2

14.4 Market Allocation of Pollution The unimpeded market not only fail to generate the efficient level of pollution control but also penalize those firm which might attempt to control an efficient amount because damage costs are externalities but control costs are not. Hence the case for some sort of government intervention is particularly strong for pollution control.

14.5 Defining A Cost-Effective Allocation Assume: there are two emission sources currently emitting a total 30 units of emission. the environment can assimilate 15 units, so that a reduction of 15 units is necessary. How should this 15-unit reduction be allocated between the two sources in order to minimize the total cost of the reduction?

Figure 15.3

14.5 Efficient Policy Responses One way would be to impose a legal limit on the amount of pollution allowed by each emitter. An alternative approach would be to internalize the marginal damage caused by each unit of emissions by means of a tax or charge on each unit of emissions.

14.5 Efficient Policy Responses However, while the efficient levels of these policy instruments can be easily defined in principle, they are very difficult to implement in practice for information asymmetry . How can environmental authorities allocate pollution control responsibility in a reasonable manner when the information burdens are apparently so unrealistically large? Cost-effective criterion

14.6 Cost-Effective Policies For Uniformly Mixed Fund Pollutants 14.6.1 Defining A Cost-effective Allocation 14.6.2 Cost-effective Pollution Control Policies

14.6.1 Defining A Cost-Effective Allocation The cost of achieving a given reduction in emissions will be minimized if and only if the marginal costs of control are equalized for all emitters.

14.6.2 Cost-effective Pollution Control Policies Because of information asymmetry, can the cost-effective allocation be found? The answer depends on the approach taken by the control authority.

14.6.3 Emission Standards An emission standard is a legal limit on the amount of the pollutant an individual source is allowed to emit. In the absence of information on control costs, the easiest method would be simply to allocate each source an equal reduction. But the total control costs would increase compare to a cost-effective allocation.

14.6.4 Emission Charges An emission charge is a fee, collected by the government, levied on each unit of pollutant emitted into the air or water. It would pay the firm to reduce emissions until the marginal cost of reduction is equal to the emission charge. Without knowing the cost of control, the control authority cannot establish the correct tax rate on the first try. However, it is possible to develop an iterative, trial-and-error process to find the appropriate charge rate.

Figure 15.4

Figure 15.5

14.6.5 Transferable Emission Permits Under this system, all sources are required to have permits to emit. Each permit specifies exactly how much the firm is allowed to emit. The permits are freely transferable, they can be bought and sold. The control authority issues exactly the number of permits needed to produce the desired emission level.

14.6.5 Transferable Emission Permits Why does this system automatically leads to a cost-effective allocation?

Figure 15.6

Objectives & Requirements: Understand the pollutant taxonomy Grasp the efficient allocation of pollution Understand the market allocation of pollution Grasp the cost-effective allocation of pollution Understand cost-effective pollution control policies