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