Pollution mechanism

• In thinking about pollution policy, the

economist is interested in two major
questions.
• How much pollution should there be? And,
given that some target level has been chosen,
what is the best method of achieving that
level
• How much pollution there should be depends
on the objective that is being sought. Many
economists regard economic optimality as the
ideal objective.
• This requires that resources should be
allocated so as to maximise social welfare.
Associated with that allocation will be the
optimal level of pollution.
• However, the information required to establish
the optimal pollution level is likely to be
unobtainable, and so that criterion is not
feasible in practice.
• the weaker yardstick of economic efficiency is
often proposed as a way of setting pollution
targets.
• Pollution targets may be, and in practice often
are, determined on grounds other than
economic efficiency or sustainability.
• They may be based on what risk to health is
deemed reasonable, or on what is acceptable to
public opinion. They may be based on what is
politically feasible.
• In the final analysis, pollution targets are
rarely, if ever, set entirely on purely economic
grounds. Standards setting is usually a matter
of trying to attain multiple objectives within a
complex institutional environment.
• In particular, residual flows impose loads upon
environmental systems. The extent to which
these waste loads generate impacts that are
associated with subsequent damage depends
upon several things, including:
• the assimilative (or absorptive) capacity of the
receptor environmental media;
• the existing loads on the receptor
environmental media;
• the location of the environmental receptor
media, and so the number of people living
there and the characteristics of the affected
ecosystems;
• tastes and preferences of affected people.
• Pollution can be classified in terms of its
damage mechanism. Whether damage arises
from the flow of the pollutant( the rate of
emission) or from the stock ( concentration
rate) of pollution in the relevant environmental
medium.
• Flow damage pollution occurs when damage
results only from residuals: that is the rate at
which they discharge into the environmental
system.

• Pure case of flow - damage pollution, the

damage will instantaneously drop to zero if the
emission flow become zero. Eg. Noise or light
 Cont…
• Stock damage pollution describes the case in
which damage depend only on the stock of the
pollution in the relevant environmental system
at any point in time.
• For a stock of the pollutant to accumulate it is
necessary that the residuals have a positive life
span and that emissions are being produced at
a rate which exceeds the assimilative capacity
of the environment.
• Most important pollution problems have the attribute
of a stock-damage pollution effect being present. The
most prominent are those which affect human health
and life expectancy.
• Stock pollution levels influence plant and
timber growth, and the size of marine animal
populations.
• Less direct effects operate through damages to
environmental resources and ecological
systems.
• The assimilative capacity of the environment
depends on the emission load to which
relevant environment media are exposed.
• In water systems, for example, bacterial
decomposition of pollutants is the principal
cleaning agency.
• But where critical loads are exceeded, this
biological conversion process breaks down,
and the water system can effectively become
dead. Its assimilative capacity has fallen to
zero.
 Cont…
• Flow damage pollutant: D = D(M)
• Stock damage pollution : D = D(A)
 Efficient level of pollution
• Pollution is harmful, so only a zero level of
pollution is desirable. But pollution can also be
beneficial. In what sense pollution is beneficial
?
• => producing some goods and services which
are useful may not possible without generating
some pollution, even if only a small amount.
• Goods might only be producible in non
polluting ways at a large additional expense,
relaxing a pollution abatement constraint
allows the production of goods that could not
otherwise have been made.
 A static model of efficient flow pollution

• A simple static model – time plays no role. In this

model emissions have both benefit and damages.
• In pollution literature, the costs of emissions are
called damages. These damages can be thought as a
negative externality.
• Production entails joint products – intended good and
the associated pollutant emissions. The costs
associated with production of the intended goods are
paid by the producer, so internalized. But the cost of
pollution damage are not met by the firm.
• Suppose damage is independent of the time or
source of the emissions and that emissions
have no effect outside the economy.
• An efficient level of emissions one that
maximize the net benefits from pollution,
where net benefits are defined as pollution
benefits minus pollution costs( damages).
• In the case of flow pollution, damage (D) is
dependent only on the magnitude of the emissions
flow (M), so that Damage function can be specified
as: D=D(M)
• Benefits of pollution?
• Suppose firms were required to produce their
intended final output without generating any
pollution
• Now consider what will happen if that requirement
is gradually relaxed.
• As the amount of allowable emissions rises, firms
can increasingly avoid the pollution abatement
cost that would otherwise be incurred. Therefore
firms make cost saving if they are allowed to
generate emissions in producing their goods.
• The larger is the amount of emissions generated,
the greater will be those cost savings. It is these
cost savings that we regard as the benefits of
pollution.
• We can represent this relationship by the
function
B = B(M)
The social net benefits (NB) from a given level
of emissions are defined by
NB = B(M) – D(M)
• Total damage is rise at an increasing rate with
the size of the pollution flow and so the MD
will be increasing in M
• Total benefits will rise at a decreasing rate as
emissions increases. Therefore the MB of
pollution would fall as pollution flow increases.
• To maximize the net benefits of economic
activity, we require that the pollution flow, M,
be chosen so that
• Which states that the net benefits of pollution can
be maximized only where there the MB of
pollution equal the marginal damage of pollution.
• The efficient level of pollution is M*. If the
pollution is less than M*, the MB of pollution
are greater than the MD from the pollution. So
higher pollution will yield additional net benefits.
• The value of MD and MB at their intersection is
labeled U*.
 Modified efficiency target
• Sometimes, one particular kind of pollution
cost (damage) is regarded as being of such
importance that pollution costs should be
defined in terms of alone.
• Let us assume risks to human health the only
damage that counts( in setting targets). How
would this affect pollution target?
• Total health risk are zero below the threshold,
but at the threshold itself risks to human
health become intolerably large.
• The value of marginal benefits is irrelevant
here, efficient target being set by the damage
threshold alone.
• If marginal health damage is a rising and
continuous function of emissions, A trade now
exists in which lower health risks can be
obtained at the cost of some loss of pollution
benefits.
 No regrets and a double dividend from environmental
control?

• It is sometimes possible to achieve environmental objectives at

no cost or, better still, at ‘negative’ cost. Not surprisingly, ways
of doing things that have such effects are known as ‘no regrets’
policies. There are several reasons why these may arise:
• double dividends;
• elimination of technical and economic inefficiencies in the
energy-using or
• energy-producing sectors;
• induced technical change;
• achievement of additional ancillary benefits,
• such as improved health or visual amenity.
• The double dividend hypothesis
• The double dividend idea arises from the possibility that
the revenues from an emissions tax (or a system of permits
sold by auction) could be earmarked to reduce marginal
rates of other taxes in the economy.
• If those other taxes have distortionary (i.e. inefficiency-
generating) effects, then reducing their rate will create
efficiency gains. Thus an environmental tax with revenues
ring-fenced for reducing distortionary taxes has a double
benefit (dividend); the environment is improved and
efficiency gains accrue to the economy as whole.
• There are other reasons why ‘no regret’
options may be available. The existence of
market imperfections can cause firms to be
producing away from the frontier of what is
technically and/or economically possible.
Firms may be unaware of new techniques, or
poorly informed
• about waste recycling mechanisms. Companies
may have old, technologically obsolete capital, but
are unable because of credit market imperfections
to update even when that would generate positive
net present value. An environmental programme
that requires firms to use new, less polluting
techniques, or which provides incentives to do so,
can generate a different kind of double benefit.
Pollution is reduced and productive efficiency
gains are made.
• One special case of this is dynamic efficiency
gains, arising through induced technical
change. It has long been recognised (see, for
example, Porter, 1991) that some forms of
regulatory constraint may induce firms to be
more innovative. If a pollution control
mechanism can be devised that accelerates the
rate of technical change, then the mechanism
may more than pay for itself over the long run.
• More generally, there is a large set of possible
ancillary benefits to environmental reforms.
Perhaps the most important type is health
benefits. Reductions of greenhouse gases tend
to go hand in hand with reductions in
emissions of secondary pollutants (such as
particulates, sulphur dioxide, nitrogen dioxide
and carbon monoxide), which can have
important health impacts.
 Efficient levels of emissions of stock
pollutant
• The majority of important pollution problems
are associated with stock pollutants.
• Pollution stocks derive from the accumulation
of emissions that have a finite life.
Pollution control where damages depends on
location of the emissions
• Suppose stock pollutants have relatively short
residence times in environmental media into
which they are dumped.
• S1 and S2, that are located near four urban
areas, R1, R2, R3 and R4. These areas contain
populations whose health is adversely affected
by local ambient concentrations of the
pollutant.
• We assume that emissions from the two sources persists
for at most a few days. Any one day pollutant
concentrations are determined purely by emissions of
last few days. No long term accumulation effect taking
place.
• Uniformly mixing –if physical processes operate so that
the pollutant quickly becomes dispersed to the point
where its spatial distribution is uniform.
• The damage depends upon the total amount of the
pollutant entering the system, independent of
geographical location.
What happen if pollutant is not UM
• Flow pollution model can not be used. Most air,
water and ground pollutants are not uniformly
mixing.
• In figure emissions from S1 are going to matter
much more for the four receptor areas than
emissions from S2.
• Emissions from S1 raise pollutant concentration
levels to a greater amount in R1 than in the other
three receptors. R4 is likely to suffer the least from
emissions by either source.
Other factors…
• Suppose R1 is at high elevation, whereas R2 is
situated in a depression surrounded by a ring of
hills.
• Then R2 may experience the highest
concentrations.
• Non uniform mixing is of a great importance as
many types of pollutant fall into this category.
Eg. Ozone accumulation in the lower atmosphere,
particulate pollutants from diesel engines.
 Ambient pollution standards

• the situation in which the location of polluters

and people is already determined, and moving
either is not a feasible option. Our interest
must then lie in how targets for emissions from
the various sources can be calculated
• we regard the environment as a series of spatially
distinct pollution ‘reception’ areas (or receptors).
• Suppose that there are J distinct receptors, each being
indexed by the subscript j (so j = 1, 2, . . . , J) and N
distinct pollution sources, each being indexed by the
subscript i (so i = 1, 2, . . . , N).
• Various physical and chemical processes determine
the impact on pollutant concentration in any
particular receptor from any particular source. For
simplicity, we assume that the relationships
• In that case, a set of constant ‘transfer
coefficients’ can be defined.
• The transfer coefficient dji describes the impact
on pollutant concentration at receptor j
attributable to source i.
• The total level, or concentration rate, of
pollution at location j, Aj, will be the sum of the
contributions to pollution at that location from
all N emission sources. This can be written as
 𝑁
𝐴 ¨𝐽 =∑ 𝑑𝑗 𝑖 𝑖
𝑀

𝑖=1
• where Mi denotes the total emissions from
source I
• we have N = 2 sources and J = 4 receptors.
• A1 = d11M1 + d12M2
• A2 = d21M1 + d22M2
• A3 = d31M1 + d32M2
• A4 = d41M1 + d42M2
• We can collect all eight dji coefficients into a J
× N matrix, D.
• Denoting the vector of emissions from the two
sources as M and the vector of ambient
pollution levels in the four receptors as A we
have A = DM
•
• 𝑗
𝐵 𝑖 (𝑀 𝑖 )= ∑ 𝐷 𝑗 ( 𝐴 𝑗 )𝑑 𝑗𝑖
′ ′

𝑗=1
• The emissions target (or standard) for each firm should be set so that the
private marginal benefit of its emissions is equal to the marginal damage
of its emissions
• ith firm’s emissions are transferred to some or all of the receptors, the
marginal damage attributable to the ith firm is obtained by summing its
contribution to damage over each of the J receptors.
• An interesting property of the solution to
equation is that not only will the efficient
emission level differ from firm to firm, but
also the efficient ambient pollution level will
differ among receptors
• Firms located at different sources have different
pollution impacts: other things being equal, those
sources with the highest pollution impact should
emit the least.
• Receptors at different spatial locations will
experience different pollution levels: other things
being equal, those receptors which would (in an
unconstrained world) experience the highest
pollution-stock level should have the highest
efficient ambient pollution level.
 Inter temporal analysis of stock
pollution
• the case of stock pollutants that have a
relatively long active (i.e. damaging) lifespan
but which are uniformly mixing.
• the uniformly mixing assumption implies that
pollutant concentrations will not differ from
place to place, and so the spatial dimension of
emissions control is no longer of direct
relevance.
• Persistence of pollution stocks over time
means that the temporal dimension is of
central importance.
• Damage at time t is determined by the
contemporaneous stock size or concentration
rate of the pollutant in a relevant
environmental medium.
• Gross benefits depend on the flow of
emissions. Hence our damage and (gross)
benefit functions have the general forms
• Dt = D(At )
• Bt = B(Mt )
• except in the special case where pollutants are
infinitely long-lived, part of the existing stock will
decay or degrade into a harmless form over time,
thereby having a negative impact on stock
accumulation.
• A convenient way of representing this stock–flow
relationship is by assuming that the rate of change
of the pollutant stock over time is governed by the
differential equation
• At = Mt − αAt
• The net effect on A (and so whether At is
positive or negative overall) depends on the
magnitudes of the two terms on the right-hand
side of equation
• The parameter α is a proportion that must lie in
the interval zero to one. A pollutant for which
α = 0 exhibits no decay, and so the second
term on the right-hand side of equation is zero.
• This is known as a perfectly persistent
pollutant. More generally, we expect to find 0
< α < 1, and denote this as an imperfectly
persistent pollutant.
• Here, the pollutant stock decays gradually over
time, being converted into relatively harmless
elements or compounds.
• the relationship between M and A is not
independent of time.
  t
At   ( M t   At ) d
 t0
• where to denotes the first point in time at
which the pollutant in question was emitted.
• Thus the pollution stock level at any time t, At,
depends on the entire history of emissions up
to that point in time.
• Even if emissions had been at a constant level
in the past and were to remain so in the future,
A would not be constant throughout time.
• Put another way, as emissions at time t add to
pollution stocks at that time and in future time
periods, there is no one-to-one relationship
between A and M. It is because time matters
here in a fundamental way
• As time periods are linked together through a stock–flow
relationship, efficient pollution targets and policies must
be derived from an inter temporal analysis.
• By assuming that the policy maker aims to maximize
discounted net benefits over some suitable time horizon.
• For simplicity, the horizon is taken to be of infinite span.
Using t = 0 to denote the current period of time, and
defining the net benefits of pollution as gross benefits
minus damages
• the policy maker’s objective is to select Mt for t = 0 to t
= ∞ to maximize
t 


 rt
B ( M t )  D ( At
) e dt
t 0
• A complete description of efficient stock
pollution will, therefore, consist not of a single
number for, but a trajectory (or time path) of,
emission levels through time. In general, this
optimal trajectory will be one in which
emission levels vary throughout time.
• However, in many circumstances, the trajectory will
consist of two phases. One of these phases is a so-called
steady state in which emissions (and concentration
levels) remain constant indefinitely at some level.
• The other is an adjustment phase; the trajectory describes
a path by which emissions (and concentrations) move
from current levels to their efficient, steady-state levels.
• This adjustment process may be quick, or it may take
place over a long period of time.
• In a steady state, by definition, the pollution
flow and the pollution stock are each at a
constant, unchanging level.
• Hence the time subscripts we have attached to
variables become redundant and can be
dropped.
• Moreover, with an unchanging stock At = 0
• M = αA.
• The intuition that lies behind this is
straightforward: for a pollutant that
accumulates over time, the pollution stock can
only be constant if emission inflows to the
stock (M) are equal to the amount of stock
which decays each period (αA).
• It then follows that in a steady state, the stock–
flow relationship between A and M can be
written as
• A= M/α
• This shows that, in a steady state, the smaller
is the value of α the larger will be the pollution
stock for any given level of emissions.
• an efficient steady-state level of pollution
emissions requires that the following condition
be satisfied:
dB dD  1 
  
dM dA  r   
• The marginal benefit and the marginal cost of
the chosen emissions level should be equal.
• An equality between the present value of the
gross benefit of a marginal unit of pollution
and the present value of the damage that arises
from the marginal unit of pollution.
• The ‘discount factor’ 1/(r + α) has the effect
of transforming the single period damage into
its present-value equivalent.
dD dB  r 
 1 
dA dM   
• Case A: r = 0, a > 0
• In this case the pollutant is imperfectly
persistent and so eventually decays to a
harmless form. With r = 0, no discounting of
costs and benefits is being undertaken.
•
•
dD dB

dM dM
An efficient steady-state rate of emissions for a stock
pollutant requires that the contribution to benefits
from a marginal unit of pollution flow be equal to the
contribution to damage from a marginal unit of
pollution flow.
• Net benefits are maximised at the steady-state
pollution flow M*. In the steady state, A* will
be at the level at which αA* = M*, and both
the pollution stock and emissions track along
through time at constant levels.
• Case B: r > 0, a > 0
• As r increases above zero, the marginal
benefits
• function rotates clockwise about the point !.
Discounting, therefore, increases the steady-
state level of emissions. Moreover, the larger
is the discount rate, the larger is the amount by
which efficient steady-state emissions rise.
• Intuitively, a larger value of r reduces the
present value of the future damages that are
associated with the pollutant stock. In effect,
higher weighting is given to present benefits
relative to future costs the larger is r.
Cases C (r > 0, a = 0) and D (r = 0, a = 0)
• In both Cases C and D the pollutant is
perfectly persistent, and so never decays to a
harmless form.
• No steady state exists except for the case in
which M is zero. A steady state cannot exist for
any positive value of M as A would rise
without bound. But then pollution damage
would also rise to infinity.
• It follows that, at some point in time, the environmental
• protection agency would have to require that emissions
be permanently set to zero to avoid the prospect of
intolerable damage.
• The pollution stock level would remain at whatever level
A had risen to by that time. Pollution damage would also
continue indefinitely at some constant level, but no
additional damage would be generated. The zero-
emissions steady-state solution turns out to be perfectly
in accord with good sense.