Regulating Pollution ppt

7/25/2019 Regulating Pollution ppt

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REGULATINGPOLLUTION

1.Picture source: http://i.ndtvimg.com/mt/2015-01/pollution_climate_AP_650_bigstr.!pg
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Rationale for Regulation

"conomic #egulation: re$ers to government intein private actions o$ %rms and individuals

&'o theories o$ regulation:

Public (nterest &heor and (nterest )roup &heo

Public (nterest &heor: main purpose o$ regulatithe promotion o$ public interest.

(nterest )roup &heor: main purpose o$ regulatiopromotion o$ narro' interest o$ particular groupssociet such as individualindustries.


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#ationale $or #egulation

*a!or point o$ distinction bet'een these t'oapproaches is:

Public (nterest &heor is a normative &heor +'

see,s to eplain 'hat should happen in an idea

'hile the (nterest )roup&heor is a positive th+'hich see,s to eplain 'h the 'orld 'or,s as

does


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nder Public (nterest &heor three general reasons !usti$government regulation

a. (mper$ect competition/natural monopol

b. (mper$ect in$ormation

c. Public goods and bads

(mper$ect competition/atural monopol

&o control prices in order to protect the consumers and prevent cand restrict mergers that ma create ecessive mar,et po'er in thethe monopolists. (t ma guarantee a monopol to a particular %rm.

(mper$ect in$ormation

ands-o34 role: to establish a set o$ liabilit rules to encourage tprovision o$ sa$et-related ualit.

irect intervention in the mar,et speci$ing acceptable levels o$


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Public good and bads:Private mar,ets are ine7cient because o$ non-rivalr and nonecludabilit. )ovt. ma step in to directl provide these good e7cient levels8 eliminating the private mar,et. &his is $reuen'ith public goods +e.g8 national de$ense and rarel the case '

bads. (n the case o$ public bads8 the usual approach is $or govde%ne a set o$ institutions and regulation to govern provision public bads8 e.g.8 the government establishes a set o$ regulatirestrict the production o$ pollution.

(nterest )roup &heor o$ regulation maintains that resee,ingis the primar rationale $or regulation.

#ent-see,ing involves private individuals or %rm using the govguarantee etra pro%ts +rent through government mandated on economic activit.


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A Political Economy Model oRegulation

&he basic problem o$ environmental regulation involves thgovernment tring to induce a polluter to ta,e sociall desactions8 'hich ostensibl are not in the best interest o$ the

&he main problem8 there$ore8 is determination o$ eact levpollution'hich is best $or the societ.

(n realit the government $aces pressures $rom consumerspolluters.

9igure in the net page presents a highl stlied schematdiagram o$ the interactions among government8 polluting %consumer citiens.


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FIGURE 1 ;chematic o$ interactions among government8 polluting %rms8 and consumer citiens.


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)overnment

&he )overnment as sho'n in %gure 18 consists o$ thbranches: the


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&he 9irm

&he %rm consists o$ several pieces:the @oard o$ irectors8 *anagers8 "mploees8 ;toc, aolders.

&he @oard issues directives to the managers the manaissue directives to emploees 'ho produce the product%rm as 'ell as pollution.

&he ,e point is that regulators direct the @oard to ta,eactions8 but the @oard is removed8 b several steps8 $roemploees 'ho actuall generate the pollution.

ote that the %rm ma in?uence legislation through lob%nancial incentives.


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&here arises Principal-agent problem due to inabthe regulator to completel control the polluter.

&he %rm ma not be a passive entit but ma inin?uence legislation8 through lobbing or %nancincentives +sho'n b the line @

&he third component o$ the %gure8 the consumevotes and other in?uence to the legislature +line'hile at the same time sending mone to the %rechange $or the goods consumed. &he consumgood as 'ell as the pollution.


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(nclusion o$


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@A;(C #")


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Command and Control can ta,eseveral $orms

1. 9or eample the Clean Air Act4. Pollution controls and emission rates8 minimum pollution c

per$ormance.

9urther more8 the speci%c pollution control euipment recan be speci%ed or alternativel the regulation ma speci$emission limit $or particular tpes o$ plants and particular

pollutants.2. Command and Control ma be combined 'ith signi%nes and penaltiesassociated 'ith noncompliance. &hho'ever8 di3ers $rom the economic incentives to abatpollution on t'o salient points.


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2.a. #estricted choice $or the polluters as to 'hat meanused to achieve an appropriate environmental target

2.b. A lac, o$ mechanism $or eualiing marginal contramong several di3erent polluters.

E. &he best analog $or Command and Control is

sstem o$ central planning +eisted in the $ormenion.

o'ever ma!or problem o$ this is the enormousreuirement o$ in$ormation.


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Advantages:

a. *ore ?eibilit in regulating comple environmprocess and much greater certaint in ho' muchpollution 'ill result $rom regulations.

b. (t simpli%es monitoring o$ compliance 'ith aregulation. +Chec, euipment.


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isadvantages:

a.&he regulator sstem ma be ver costlto administer asin$ormational costs are high. Polluter ma lie.

b. (t ma reduce incentives to %nd better 'as to control poll

c. i7cult in satis$ing the eui-marginal principle8 i.e. it is impossible $or command and control regulations to ensure thmarginal costs o$ pollution are eualied among di3erent pol

generating the same pollution. +@B and


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"conomic incentives provide re'ards $or pollute'hat is perceived to be in the public interest.

&hree basic tpes o$ economic incentives includemar,etable permits and liabilit.

Fees

9ees involve the pament o$ charge per unit o$ pollutemitted. Fhen a polluter must pa $or ever unit o$ pemitted8 it becomes in the polluterGs interest to reducemission.


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Mar!eta"le Permit A mar,etable permit allo's polluter to bu and sell th

pollute. &rading induces a price or value on a permit tthus8 causing %rms to see polluting as an epensive a


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Mar!eta"le Permit

Assume a situation 'here t'o polluters eist andinterested in allo'ing 100 units o$ pollution in to


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FIGURE # (llustration o$ permit trading $or t'o %rms. MS18 marginal savings $rom emitting8 %rm

1 MS28 marginal savings $rom emitting8 %rm 2 eH8 euilibrium holding o$ permitsp*, euilibrium price

permits.


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Lia"ility

&he basic idea is that i$ ou harm someone8 ou mcompensate that person $or damage.


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Lia"ility

@oth costs to dump and damage to societ are sas $unctions o$ the level o$ precaution.

&he sociall desirable level o$ precaution isx*, athe marginal costs o$ ta,ing more precaution areo3set b the reduction in marginal damage $rommore precaution.

ere8 negligence liabilit 'or,s in the sense thatthreat o$ being held responsible $rom accident dis o$ten a su7cient incentives $or %rms to ta,e thsociall desirable amount o$ precaution.


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FIGURE $ An illustration o$ precaution and liabilit.


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Ad%antages of EconomicIncenti%es

Compared to the Command and Control *easure"conomic (ncentives has $ollo'ing advantages. 1. (n$ormational reuirements are less signi%cant

2. "conomic incentives provide an incentive $or a polinnovate8 %nding cheaper 'as o$ controlling pollutio

E. "conomic incentives involve the polluter paing $ocosts as 'ell as pollution damage. &here$ore8 there isimplicit subsid to the industr.

J. 9or man economic incentives the eui-marginal pholds true.


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&isad%antages of EconomicIncenti%es

*a!or disadvantages o$ "conomic (ncentives are as 1. eveloping an economic incentive that e7cientl and

ta,es compleities in environmental trans$ormation intocan be ver di7cult.

2. )iven the political conditions8 it is ver di7cult to ad!level o$ incentives +level o$ $ee8 number o$ mar,etable p

issued 'hen there is great deal o$ uncertaint associatethe environmental problem.

E. ;ometimes (nstituting ta +on emission ma be ver as it involves trans$er o$ massive amount o$ 'ealth $romthe government.


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#e$erences

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Regulating Pollution ppt

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