1. Topic 5: Public Policy Instruments
Command and Control Strategies

2. California Air Quality: Effectiveness of Standards

3. Learning Objectives At the end of this session, you should be able to
Appreciate the complexity of applying standards as a tool in improving environmental quality
Understand the differences between the three major types of standards
Evaluate the issues underlying the application of standards in relation to the levels at which they should be set, whether they should be uniform or not and their incentive effects
Discuss the issues in relation to enforcement of standards

4. Command and Control Polices
Relies on Standards
Mandated level of performance that is enforced by law
Types of Standards
Ambient Standards
Emission Standards
Technology Standards

5. Theoretical Impact of Standards
Fig 1
Assume that the actual rate of emissions – e1
Gov. introduces a standard set at e* as maximum level of emissions
Cost to firm = area a
= compliance costs € MD
MAC a e* e1
Emissions

6. The EU National Emissions Directive 2008
Sets a maximum limit on sulphur dioxide concentrations
Ambient standards are normally expressed in terms of average concentration levels
Limits on sulphur dioxide are set at 125µg/m3 (micrograms per cubic meter) on a 24 hour basis and not to be exceeded more than 3 times a yr and a 350 µg/m3 on an hourly basis and not to be exceeded more than 24 times a year.

7. The Economics of Standards
Three Questions
What is the appropriate level at which the standard should be set?
Should the standard be applied uniformly?
What are the incentive effects of standards?

8. What is the appropriate level to set the standard?
Should you take into account marginal damages and marginal abatement costs?
Zero-Risk level
‘Reasonable level’
Efficient Emission level
Strict Standards ----’Technology Forcing’

9. At what level do you set standards?
Fig 2
e2= threshold level
e* = efficient level
e3= reasonable level € MD
MAC a e2 e* e3 e1
Emissions

10. Should Standards be applied uniformly?
The efficient level of pollution can vary for many reasons ( for eg geographic areas, meteorological conditions; specific time period etc)
Setting a single standard may not be efficient
See fig 3

11. Should Standards be applied uniformly?
Fig 3
eu= efficient level of emissions for urban area
er = efficient level of emissions for rural area
Setting one standard not efficient
MDu €
MDr
MAC a e2 eu er e1
Emissions

12. Problem with standards: Equi Marginal Principle
Authorities set standards according to equi-proportionate method rather than the equi- marginal principle
Equal standards approach will produce less reduction in total emissions than would be achieved under equi-marginal principle
Govs do not have knowledge of MAC curves of polluters

13. What are the incentive effects of standards?
How do standards affect the incentives of firms?
Key Question: Does the policy create incentives for sources to reduce emissions in cost effective ways?
Two Scenarios
Short-Run
Long-Run

14. Short Run Standards are an all or nothing approach
No incentives for firms to do better
Take away decision flexibility from producers (ie technology standards)

15. Incentives in the Long Run
Do standards provide incentives for innovation (managerial or technical) which make it less costly to reduce emissions?
WRT technology standards: NO (Why not?)
Wrt Emission standards: Yes
See fig 4

16. Emission Standards: Short Run and Long Run Incentives
Fig 4
Firm in 2 situations
MAC1 – represents abatement costs in SR
MAC 2- represents abatement costs in LR
If emission standard is set at e2, compliance =a +b for MAC1
If emission standard set at e2, compliance = b for MAC2
a = r& d incentive €
MAC1 MD
MAC2 a b e1 e2
Emissions

17. Enforcement Enforcement of standards takes resources
Penalties are not often sufficient
Trade-off between resources used in enforcement and benefits of greater compliance
Should standards be set with enforcement costs in mind?
Size of sanction for non-compliance
See fig 5

18. The Economics of Enforcement
Fig 5
C1 & C2 are curves that combine MAC and marginal enforcement costs
Correspond to different technologies of enforcement
Origin at e0 (why?)
At C1: Total costs equal to enforcement costs (a +b) and abatement costs (c +d)
What are the total costs at C2? MD € C1 C2
MAC a e b f c d eo e2 e1
Emissions

19. Enforcement Costs
Should standards be set with enforcement costs in mind?
What should the size of the sanction for breaching standards be set at?
Should authorities set less or more strict standards? Why or why not?

20. Summary Standards are the most popular method of pollution control
There are three primary types of standards (ambient, emissions and technology)
Important questions are 1) what level to set the standards at ?2) Should standards be uniform? and 3) what are the incentive effects of standards?
Enforcement including available sanctions are an important issue
Standards are very complex tools when applied to environmental policy

21. Required Reading Field & Field (chapter 11)
Case Study: Air Quality Standards: What does the automotive industry think?