1. The Economics of Environmental Quality
Lecture 5

2. Decide upon the acceptable level of environmental quality
Answer these questions
How do firms and people behave in market eco
Why are residuals emitted?
How should benefits and costs of environmental policy be distributed among society
Understanding the scientific basis of environmental policy (Level of information)

3. Pollution control – A General Model
Reducing emissions results in a trade-off
Improve environmental quality
Take up the resources that could have been used somewhere else
Example of the paper mill located upstream
Pollution Damages
All the negative impacts
Paper mill’s environmental damages?
Air pollution damages?
Nonhuman ecosystem damages?

4. Damage Function:
Shows the relationship between quantity of residual and damage that residual causes
Emission damage function
Relationship between quantity of waste emitted and the resulting damage
Ambient damage function
Relationship between concentration of particular pollutants in the ambient environment and the resulting damages
Our primary model will make use of marginal damage function

5. The first and last figures illustrate existence of threshold.
Damages $
Damages $
Emissions (tons/year)
Emissions (tons/year)
Damages $
Damages $
Ambient concentration (ppm)
Ambient concentration (ppm)
The first and last figures illustrate existence of threshold.

6. Closer look at the damage function
MD2
Highly populated area
MD2 could be at a different time period and hence, different natural environment
Damages $ 28
MD1 a 12 b e2 e1
Emissions (tons/year)
Assume: Pollutant is non-cumulative, occurring all at one time period

7. Abatement Costs
Costs of reducing residual emissions or lowering ambient concentrations
Greater the abatement, greater is the cost
Such costs vary among different pollutants and different industries and firms
Possible factors?
Abatement could refer to any way of reducing emissions: closing the site, technology use, input switching, waste treatment, etc
Relationship between abatement costs and emissions?

8. Marginal Abatement Cost Functions$ $ $
Emissions
Emissions
Emissions
Factors underlying the abatement costs curves
Managerial skills
Level of technology
Minimum costs of achieving reduction in emissions

9. Abatement costs functions: A closer look$
MAC2
Assume: Resources are being used in cost effective manner
MAC1 c1 c2 a b e e
Due to better pollution control technology
Effluent tons/year

10. Aggregate MAC Function
$/week
$/week
$/week
MAC1
MAC2 5 16 20 5 12 20 10 28 40
Emissions (tons/week)
Emissions (tons/week)
Aggregate Emissions (tons/week)
Equimarginal Principle
Lowest aggregate marginal abatement costs

11. The efficient level of Emissions
Revisit trade off inherent in the pollution control phenomenon  ?
Efficient level: these two costs exactly offset each other
Marginal damage costs = Marginal abatement costs $ MD
MAC
The position of e* could vary according to the specific pollution problem in the real world a b e*
Emissions (tons/year)

12. Changes in efficient level of emissions$ $ MD MD
MAC
MAC e* e*
Emissions (tons/year)
Emissions (tons/year)
E* is a desirable target for public policy
E* is what ought to be, hence an idea of normative economics
Did the social costs change due to reduction in e*?

13. Enforcement Costs $
The added costs of enforcement that it takes to get emissions reduction by a unit, increase as emissions decrease
It is more costly to enforce further cutbacks! MD
MAC + E
MAC
e*2
e*1
Emissions (tons/year)

14. Emissions (tons/week)
Equimarginal Principle applied to emission reduction
Suppose current emission levels are 24 tons/week
Target: Aggregate 12 tons/week
Equiproportionate cutbacks
TAC = ?
Equimarginal principle has TAC = ?
MAC = $1000/week
Emissions (tons/week)
Source A
Source B 12 11 1 2 10 4 9 3 5 8 7 14 6 20 25 31 38 24 58 94 70
160

15. Long run sustainability
Sustainability is an issue because?
While achieving economic efficiency, are we still considering future generations?
Levels of efficiency (e*) change over time
When calculating MAC and MD functions, incorporate all the short and long run costs to achieve the most efficient level of emissions
Levy upper limits on the use of resources
But some form of human judgment about future impact of any environmental policy is inevitable!