1 Economics of Pollution Control: An Overview

Chapter 14Economics of Pollution Control: An Overview

2 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.

3 14.2 A Pollutant TaxonomyAccording 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.

4 14.2 A Pollutant TaxonomyPollutants 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 pollutantsRegional pollutantsThe 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
pollutantGlobal pollutant

5 14.3 Defining Efficient Allocation of Pollution

Stock PollutantsFund Pollutants

6 Stock PollutantsThe 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.

7 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.

8 Stock PollutantsThe 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.
9 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.

10 Stock PollutantsTechnological 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.

11 Fund PollutantsThe 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.

12 Figure 15.2

13 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 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?

15 Figure 15.3

16 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.

17 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

18 14.6 Cost-Effective Policies For Uniformly Mixed Fund Pollutants

Defining A Cost-effective AllocationCost-effective Pollution Control Policies

19 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.

20 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.

21 Emission StandardsAn 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.

22 Emission ChargesAn 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.

23 Figure 15.4

24 Figure 15.5

25 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.

26 14.6.5 Transferable Emission Permits

Why does this system automatically leads to a cost-effective allocation?

27 Figure 15.6
28 Objectives & Requirements:
Understand the pollutant taxonomyGrasp the efficient allocation of
pollutionUnderstand the market allocation of pollutionGrasp the cost-effective
allocation of pollutionUnderstand cost-effective pollution control policies