EnvEco Economic Incentrives Final Syllabus

Environmental Economics
PART OF FINAL SYLLABUS

Dr. Manzoor Hussain Memon
Email: manzoorhmemon@yahoo.com
Cell: 0092 (0)321 manzoor (6269667)
Environmental
Externalities Economics
Economic Incentives: Public Response

Pollution Reduction: Emission Fee
• An Emission fee works as similar to tax;
• The only difference is tax is levied on each unit of output;
• Where is emission fees is levied on each unit of pollution;
• Let’s understand this with our hypothetical example

Environmental
Price - PKR
Pollution Reduction: Emission Fee S=MC
• Let us assume that:

• The government levies an emissions
fee that charges FE for each unit of
pollution,
• where FE is the marginal social benefit E
of pollution reduction at the efficient FE
level QE.
• Firm ‘F’ reduces pollution as long as
the cost of doing so ( MC ) is below
the amount of the emissions fee.
• Therefore, an emissions fee set at FE D=MSB
leads to the efficient amount of
pollution reduction, QE
O 0 QE Q – Pollution Reduction
Environmental
Price - PKR
Economic Incentives: Public
Response S=MC
• Let us assume that:
• The government levies an
emissions fee that charges FE for E
each unit of pollution, FE
• Firm ‘F’ won’t go beyond ‘FE’

• As MC will > FE,
• Means MC of reducing pollution is
D=MSB
greater than the emission fees;
O 0 QE Q – Pollution Reduction
Environmental

• Emission Fees has some distinct advantages, when there is more than one
polluter it is cost effective (Means Pollution reduction at lowest possible
cost)
• But What if: Uniform pollution reduction across polluters is applied
• Whether such policy is cost effective or not.
• Uniform pollution reductions across polluters are not cost effective: HOW
• But what if: MC of reducing pollution are equal across all polluters
• The cost of cutting a given amount of pollution Is minimized or not.
• equal marginal costs across polluters, which is cost effective: HOW
Environmental

cost)
• Let’s take an hypothetical example, of Two firms Firm ‘E’ and Firm ‘F’;
• Government want to reduce the pollution from 180 to 80 units, means by
about 100 units of pollution that’s need to be reduced, by the two
pollutants together:
• What if each firm reduces the pollution by 50 units, and what if they cut
the pollution according to their marginal cost?
Environmental

• Doing efforts to reduce the pollution, the cost of doing so is different for
both firm for one reason or the other;
Price - PKR
Price - PKR
MCF
Firm E
MCE Firm F
O 0 Q – Pollution Reduction O 0 Q – Pollution Reduction

Environmental

• But What if: Uniform pollution reduction across polluters is applied
• Whether such policy is cost effective or not.
MCE
Price - PKR
Price - PKR
Firm E MCF
Firm F
O 0
Q – Pollution Reduction O 0 Q – Pollution Reduction
Environmental

• If each polluter cuts his pollution by 50 units, Firm ‘E’ marginal cost is lower than
Firm ‘F’. (example of same quality stationary buying from two shops for
explanation)
MCF
Price - PKR
Price - PKR
Firm E MCE E
Firm F
O 0
50 Q – Pollution Reduction O 0 50 Q – Pollution Reduction
Environmental

• Therefore, requiring Firm ‘E’ to reduce more and Firm ‘F’ to reduce less achieves the
same reduction goal at a lower total cost.
MCF
Price - PKR
Price - PKR
Firm E MCE
Firm F
E E
FE FE
O 25 50
0 75 90 Q – Pollution Reduction O 0 25 50 75 90 Q – Pollution Reduction
Environmental

• The cost of cutting a given amount of pollution is minimized when the marginal
costs of reducing are equal across all polluters.
Price - PKR
Price - PKR
Firm E MCE MCF
Firm F
E E
FE FE
O 25 50
Environmental

• So, it is proven with the difference MC, the uniform pollution reductions across the
polluters are not cost effective.
C C
Price - PKR
Price - PKR
MCE MCF
E E
FE FE
O 25 50
Environmental

• But what if: MC of reducing pollution are equal across all polluters
• The cost of cutting a given amount of pollution Is minimized or not.
C C
Price - PKR
Price - PKR
MCE MCF
E E
FE FE
O 25 50
Environmental

• An Emission Fee is Cos Effective
C C
Price - PKR
Price - PKR
MCE MCF
E E
FE FE
O 25 50
Environmental

• An Emission Fee is Cos Effective
• Cost Effective: A policy that achieves a given outcome at the lowest cost possible.
C C
Price - PKR
Price - PKR
MCE MCF
E E
FE FE
TAX
TAX
O 25 50
Environmental

• An emissions fee induces each polluter to reduce pollution up to the point where the
marginal cost of reducing equals the level of the fee. This results in equal marginal
costs across polluters, which is cost effective.
C C
Price - PKR
Price - PKR
MCE MCF
E E
FE FE
TAX
TAX
O 25 50
Environmental

cost)
• So, the key advantage of applying the Emission Fee is considered to be cost
effective.
• But it is INEQUITABLE
• Because it requires different levels of responsibility for pollution reduction
• These concerns will be discussed in E3 model in later slides.

Environmental

• Quantity Rationing: Marketable Permits
• Under the concept of Quantity Rationing, there is a system of permits which
allows or restricts producer to pollute;
• Thus, there is a limit or cap is placed on the total amount of pollutant that
may be emitted;
• The permits to pollute are also considered to be trade-bale in the respective
markets created for such trade;
• So, this limit is either allocated or sold to a firm in the form of emission
permits;
• This system of Marketable Permits are also known as Cap-and-Trade System;

Environmental

• This system of Marketable Permits are also known as Cap-and-Trade System;
• Under this system, the firm will be willing to sell permit as long as the market
price of permit is greater than Marginal cost of reducing pollution.
• The other firm will be willing t buy permits as long as the Marginal Cost of
reducing the pollution is greater than the market price of the Permit;
• Thus, in equilibrium, each firm will reduce pollution to a level such that
Marginal cost pollution reduction is equal to market price of permit.
• Lets analyze with the hypothetical example of two firms Firm ‘E’ and Firm ‘F’.

Environmental

• Doing efforts to reduce the pollution, the cost of doing so is different for
both firm for one reason or the other;
Price - PKR
Price - PKR
MCF
Firm E
MCE Firm F
O 0 Q – Pollution Reduction O 0 Q – Pollution Reduction

Environmental

• Government wants to cut pollution from 180 units to 80 units. The
government will issue 80 permits each year. But the question is how to
allocate them between two firms i.e. Firm ‘E’ and Firm ‘F’;
MCE MCF
Price - PKR
Price - PKR
Firm E
Firm F
10
O 0
10 25 50
75 90 Q – Pollution Reduction O 0 25 50 75 90 Q – Pollution Reduction
Environmental

• Suppose Firm ‘E’ receives 80 permits; then Firm E has to reduce pollution by
10 units (Point A) out of 90 units; whereas the Firm ‘F’ has not permit, so has
to reduce the pollution by 90 units (Point B);
B
MCE MCF
Price - PKR
Price - PKR
Firm E
Firm F
10
O 0
10 25 50
Environmental

• Suppose Firm ‘E’ receives 80 permits; whereas the Firm ‘F’ has not permit;;
• So, there is a scope to bargain between ‘E’ and ‘F’
B
MCE MCF
Price - PKR
Price - PKR
Firm E
Firm F
10
O 0
10 25 50
Environmental

• Firm ‘F’ has no permit; So, F has to reduce emissions by 90 units; which is
highly costly than paying a fee (point b);
B
MCE MCF
Price - PKR
Price - PKR
Firm E
Firm F
10
O 0
10 25 50
Environmental

• Both Firm ‘E’ and Firm ‘F’ must have to eliminate pollution;
• The Market for Marketable Permits will be created and The Market price of
Permit is PE B
MCF
MCE
Price - PKR
Price - PKR
Firm E
Firm F
PE PE
O
0
10 25 50 75 90 Q – Pollution Reduction O 0 25 50 75 90 Q – Pollution Reduction
Environmental

• So, Firm ‘E’, eliminate the pollution beyond 10 units till 75 units or below;
• The cost of elimination will be less than the Market price of Permit is PE
B
MCF
MCE
Price - PKR
Price - PKR
Firm E
Firm F
E E
PE PE
O
0
Environmental

• Similarly, Firm ‘F’, has to eliminate the pollution till 90 units;
• But there are Market permits available at the price PE ; which is less than
the marginal cost of pollution control beyond 25 units; B
MCF
MCE
Price - PKR
Price - PKR
E E
PE PE
O
0
Environmental

• So, we can say at Point A (Firm E) and at Point B (Firm F);
• Marginal Cost of pollution control (Firm E) is less than the Marginal Cost of
Pollution Control (Firm F)  MCE < MCF;
C
MCE
Price - PKR
Price - PKR
Firm E MCF
Firm F
E E
PE PE
O
0
Environmental

• The process of this trade of marketable permits continues till;
• Marginal Cost of pollution control (Firm E) is equal to the Marginal Cost of
Pollution Control (Firm F)  MCE = MCF; B
MCF
MCE
Price - PKR
Price - PKR
Firm E
Firm F
E E
PE PE
O
0
Environmental

• The process has cost effective outcome;
• So, we can say that Cap-and-trade system is a cost effective policy;
B
MCF
MCE
Price - PKR
Price - PKR
Firm E
Firm F
E E
PE PE
O
0
Environmental

• Emission Fee versus Cap-and-Trade System
MCE
Price - PKR
• Responsiveness to Inflation: Suppose that the
economy is experiencing inflation. If the emission fee
is not adjusted with the price level each year, then in
real terms its cost to Firm ‘E’ and Firm ‘F’ falls over
time; E
• Means: value over time will reduced from FE to FI; FE
• In other words inflation lowers the real emission fee,

which leads to less pollution reduction (Firms will FI
prefer to pay fee rather than reducing pollution at
higher cost);
• In contrast, the cap-and-trade systems leads to the O 0 25 75 Q – Pollution
same amount of pollution regardless of inflation. Reduction
• The advantage of Cap-and-trade system is that no

legislative or regulatory action is needed, the
adjustment take place in the trading markets;
Externalities Environmental
Economics

• Responsiveness to Cost Changes: The MCA
marginal cost of reducing pollution is likely to
Price - PKR
change from year to year.
• The cost might increase if, for example, the
demand for the goods being made by the MCE
polluting firm increase, thus increasing the
opportunity cost of scaling back production;
FE
• An increase in Marginal cost curve leads to
less pollution reduction (or more pollution);
the firms will opt to pay the fee imposed on
pollution instead f reducing another unit of
pollution; (From EE to EA )
• So with the emission fee, pollution reduction
decreases as marginal costs increase; 0 EA EE
Q – Pollution
Dr. Manzoor Hussain Memon Reduction
Environmental

• Responsiveness to Cost Changes: The marginal cost of reducing pollution is
likely to change from year to year.
• But incase, the cap-and-trade system is in place, and there is an increase in
marginal costs;
• The level of production reduction stays the same;
• Because a cap-and-trade system sets a strict limit on pollution, which does
not vary as economic conditions change;
• However, unlike emission fees, the cost of achieving the pollution reduction
can become very high as marginal costs increase;

Environmental

• In essence, emission fee limits the cost of reducing pollution but leads to
changes in emission as economic circumstance changes;
• Whereas cap-and-trade system limits the amount of emissions but leads to
changes in the cost of reducing pollution as the economy changes;
• Neither system automatically leads to an efficient outcome when the costs
of pollution reduction change

Environmental

• Responsiveness to Cost Changes: The marginal cost of reducing pollution is likely
to change from year to year. One interesting option is to combine the cap-and-
trade system with the emissions fee.
• In this hybrid approach, the government sets up a cap-and-trade system that fixes
the amount of allowable pollution;
• However, the government also makes it known that it will sell a many additional
permits as is demanded at a pre-established price.
• This price, known as the safety valve price, can be set rather high so it will only be
used if the cost of pollution reduction is much higher than expected.
• In fact, the safety valve relaxes the pollution cap f the marginal cost of reduction
increase beyond a level that policy makers deem acceptable.
Environmental

• The cost might also decrease if firms learn to use their inputs more
efficiently;

Environmental

Emission Fee versus Cap-and-Trade System
• Responsiveness to Uncertainty: The costs of addressing many important
environmental problems are highly uncertain.
• When such uncertainty exists, an emission fee and a cap-and-trade program
can leas to different results.
• Inelastic Marginal Social Benefit Schedule;
• Elastic Marginal Social Benefit Schedule;

Environmental

• Emission Fee versus Cap-and-Trade MCA
System
Price - PKR
• Responsiveness to Uncertainty: Inelastic
Marginal Social Benefit Schedule and the
MCE
costs are Uncertain;
• The Point EA to EF, too little pollution
reduction; FE
• The Point EA to EE, too much pollution

reduction; MSB
• The Point EA is considered to be an efficient

outcome;
O 0 E EA EE Q – Pollution
Reduction
Environmental

• Emission Fee versus Cap-and-Trade System MCA
Price - PKR
Marginal Social Benefit Schedule and the costs
are Uncertain;
MCE
• When marginal social benefits are inelastic
and costs are higher than expected, neither
cap-and-trade nor an emissions fee is perfectly FE
efficient.
• Cap-and-trade achieves too much pollution
reduction and an emissions fee achieves too MSB
little pollution reduction.
• However, cap-and-trade is more efficient; Lets
see how? O 0 E EA EE Q – Pollution
Reduction
Environmental

Price - PKR
are Uncertain;
MCE
• Suppose Marginal Cost Schedule is MCE.
• if the government were to use a cap-and-trade
system, it would issue enough permits to FE
achieve a reduction of EE;

• Remember, with a cap-and-trade system, the
MSB
level of pollution (and thus pollution
reduction) is fixed no matter what happens to
costs;
O 0 EF EA EE Q – Pollution
Reduction
Environmental

System
Price - PKR
Marginal Social Benefit Schedule and the MCE
• Suppose Marginal Cost Schedule is MCA. FE
• Then the efficient outcome would be EA;

• so the cap-and-trade leads to too much MSB
pollution reduction (that is, EE > EA );

Reduction
Environmental
Economic Incentives : Public Response

Price - PKR
are Uncertain;
MCE
• What happens if the government uses an
emissions fee (FE) under these circumstances?
• Suppose Marginal Cost Schedule is MCE. FE
• Then the efficient outcome would be EE;

• Recall that with an emissions fee, the level of MSB
pollution (and thus pollution reduction)
changes as the cost curves change;
Reduction
Environmental
Economic Incentives : Public Response

MCA
Price - PKR
are Uncertain;
• What happens if the government uses an MCE
• Suppose Marginal Cost Schedule is MCA.
FE
• The reduction in pollution in the presence of
emission fee will be restricted and feasible at
point EF ;
MSB
• Whereas the efficient outcome would be EA
• In relation to point EF, the point EE is closer to
point EA O 0 EF EA EE Q – Pollution
Reduction
Environmental

• Responsiveness to Uncertainty: Inelastic Marginal Social Benefit Schedule;
• while the cap-and-trade outcome was only mildly inefficient if the costs were higher
than expected, the emissions fee outcome is highly inefficient;
• We conclude that a cap-and-trade system is preferable to an emissions fee when
marginal social benefits are inelastic and costs are uncertain;
• Intuitively, when marginal social benefits are inelastic, a change in cost has very little
effect on the optimal amount of pollution reduction;
• Therefore, a cap-and-trade system (which fixes the amount of allowable pollution)
won’t deviate much from the new efficient level.
• While this analysis has focused on the case where the marginal costs of pollution
reduction are higher than expected, similar results can be derived when they are
lower than expected.
Environmental

System
Price - PKR
• Responsiveness to Uncertainty: Elastic
Marginal Social Benefit Schedule and the
MCE
• The Point EA to EF, too little pollution
reduction; FE
• The Point EA to EE, too much pollution

reduction;
MSB
• The Point EA is considered to be an efficient
outcome;
O 0 EF EA EE
Q – Pollution
Environmental

Price - PKR
are Uncertain; MCE

• if the government were to use a cap-and-trade FE
system, it would issue enough permits to
achieve a reduction of EE;
• Remember, with a cap-and-trade system, the MSB
level of pollution (and thus pollution

reduction) is fixed no matter what happens to O 0 EF EA EE
costs; Q – Pollution
Environmental

System
Price - PKR
Marginal Social Benefit Schedule and the MCE
• Suppose Marginal Cost Schedule is MCA. FE
• Then the efficient outcome would be EA;

• so the cap-and-trade leads to too much MSB
pollution reduction (that is, EE > EA );
O 0 EF EA EE
Q – Pollution
Environmental

Price - PKR
are Uncertain; MCE
• What happens if the government uses an

emissions fee (FE) under these circumstances? FE
• Then the efficient outcome would be EE;
MSB
• Recall that with an emissions fee, the level of
pollution (and thus pollution reduction)
changes as the cost curves change; O 0 EF EA EE
Q – Pollution
Environmental

MCA
Price - PKR
are Uncertain;
• What happens if the government uses an MCE
• Suppose Marginal Cost Schedule is MCA.
FE
• The reduction in pollution in the presence of
emission fee will be restricted and feasible at
point EF ;
• Whereas the efficient outcome would be EA MSB
• Unlike inelastic, the point EF is closer to point

EA O 0 EF EA EE
Q – Pollution
Environmental

• Responsiveness to Uncertainty: Elastic Marginal Social Benefit Schedule and
the costs are Uncertain; Unlike inelastic, the point EF is closer to point EA
MCA
Price - PKR
MCA
Price - PKR
MCE MCE
FE FE
MSB
MSB
O 0 EF EA EE O 0 EF EA EE
Dr. Manzoor Hussain Memon Q – Pollution Q – Pollution
Reduction
Environmental

• Responsiveness to Uncertainty: Elastic Marginal Social Benefit Schedule;
• We conclude that an emissions fee is preferable to a cap-and-trade system
when marginal social benefits are elastic and costs are uncertain.
• Intuitively, when marginal social benefits are elastic, a change in cost has a big
effect on the optimal amount of pollution reduction.
• Therefore, a cap-and-trade system (which fixes the amount of allowable
pollution) deviates substantially from the new efficient level;

Environmental

• Distribution Effects: Even in the certainty case when cap-and-trade and
emissions fees are equivalent from an efficiency standpoint, they can have
different distributional consequences.
• With an emissions fee, polluters pay taxes for each unit of pollution and
the revenue goes to the government.
• With a cap-and-trade system, if the permits are allocated directly to the
polluters for free, then the government receives no revenue.
• On the other hand, a cap-and-trade system can generate government
revenues if the permits are sold directly by the government to polluters
rather than allocated for free.

Environmental

• Command and Control Regulation
• Emissions fees and cap-and-trade systems are called incentive-based
regulations because they provide polluters with market incentives to
reduce pollution.
• Basically, each approach increases the opportunity cost of polluting,
forcing polluters to take into account the marginal external damages
associated with their behavior.
• Incentive based regulations allow polluters great flexibility in how to
reduce their emissions.

Environmental

• Incentive based regulations allow polluters great flexibility in how to
reduce their emissions.
• Firm ‘E” might find it cheaper to reduce pollution by cutting his output
(price rationing, quantity rationing etc.), while Firm ‘F’ might find it costs
less to buy a technology that reduces pollution (Emission Fees, marketable
permits).
• Both options are allowed under an incentive-based regulation, because the
idea is to find the cheapest feasible way to reduce pollution.

Environmental

• In addition to flexibility about how to reduce pollution, there is also
flexibility about who should reduce pollution.
• For example, if the cost of reducing the marginal unit of pollution is
cheaper for Firm ‘E’ than for Firm ‘F’,
• under a cap-and-trade system Firm ‘F’ buys a permit from Firm ‘E’.
• In effect, the built-in flexibility allows Firm ‘F’ to pay Firm ‘E’ to reduce
pollution for him.
• Similarly, under an emissions fee, Firm ‘E’ reduces pollution more than
Firm ‘F’, who instead opts to pay more in taxes.

Environmental

• In contrast to these flexible approaches, the traditional approach to
environmental regulation has relied on command-and-control regulations .
• Command-and-control regulations take a variety of forms, but they all are
less flexible than incentive based regulations.
• These forms are:
• Technology standards: is a command-and-control regulation that requires
polluters to install a certain technology to clean up their emissions.
• Performance standards: is a type of command-and-control regulation that
sets an emissions goal for each polluter.

Environmental

• Technology standards: is a command-and-control regulation that requires
polluters to install a certain technology to clean up their emissions.
• Polluters are violating the law if they reduce pollution through any other means,
no matter how effective these other means might be.
• For example, legislation passed several years ago required all new power plants
to install “scrubbers” rather than allow them to clean up emissions by switching
to cleaner fuels.
• Unlike incentive-based regulation, a technology standard provides firms no
incentive to look for cheaper ways to reduce pollution.
• Therefore, technology standards are unlikely to be cost effective.

Environmental

• Performance standards: is a type of command-and-control regulation that
sets an emissions goal for each polluter.
• The polluter frequently has the flexibility to meet this standard in any way
it chooses,
• so this type of regulation is more cost effective than a technology standard.
• However, because the performance standard sets a fixed emissions goal for
each individual firm, the burden of reducing pollution cannot be shifted to
firms that can achieve it more cheaply.
• As a result, performance standards are unlikely to be cost effective.

Environmental

• A good example of an inefficient command-and-control approach is the federal
government’s corporate average fuel economy (CAFE) standards for all new passenger
vehicles.
• These standards dictate the average gasoline mileage that vehicle fleets must attain
(27.5 miles per gallon for cars and 22.2 miles per gallon for light trucks such as SUVs).
• The goal of the policy is to reduce gasoline consumption.
• CAFE standards have limited flexibility because manufacturers cannot shift the burden
among each other to lower overall cost.
• An alternative approach to reducing gasoline consumption would be to levy a tax on
gasoline, which is a form of emissions fee.
• The Congressional Budget Office compared an increase in CAFE standards to an
increase in the gasoline tax that would achieve the same reduction in gasoline
consumption and found that CAFE costs about $700 million more per year.

Environmental

• Command and Control Regulation Vs Incentive Based System
• A command-and-control approach is preferable to an incentive-based approach under
certain conditions.
• The functioning of an incentive-based approach is possible only if the emissions can be
monitored.
• If it is impossible or very expensive to monitor emissions, then the government won’t
be able to charge a per-unit emissions fee or establish whether a polluter has enough
permits to cover its emissions.
• Some forms of pollution are relatively easy to monitor, such as emissions of sulfur
dioxide from power plants.
• It is more difficult to keep track of other forms, such as agricultural runoff of chemicals,
sediment, and nutrients.
• In such cases, a technology standard might be more efficient, because it is relatively
easy to monitor whether a firm has installed the technology.

Environmental

• Command and Control Regulation Vs Incentive Based System
• Another potential problem with incentive-based regulations is that they
can lead to high concentrations of pollution in certain local areas.
• Because an incentive-based system limits total emissions from all sources,
it is possible that there will be higher emissions in some areas than others.
• If emissions concentrate in a localized area, they might cause much higher
damages than if they were more diffuse.
• Localized concentrations of emissions are known as hot spots .
• A command-and-control standard can avoid hot spots by restricting
emissions from each individual pollution source.
Environmental

• Liability Rules: Polluters Pays Principle
• Exact origin of the Principle is unknown
• But the principal was clearly articulated by Organization for Economic
Cooperation and Development (OECD);
• The Principle requires that those who cause any pollution should also pay for
the consequences;
• For instance an industry Firm ‘F’ produces any toxic waste or chemical as by
product of their operations, it should ensure the safe disposal of toxic
products;
• Example Water Treatment Plants, Chemical Treatment Processes etc.
Environmental

• The Polluter Pays Principle was successfully applied in the case of the Exxon
Valdez Oil Spill.
• Exxon has to pay billion in damages over a massive pollution incident;
• The oil tanker Exxon Valdez caused unprecedented pollution and economic
losses in Alaska, When it spilled over 300,000 barrels of rude oil in to Alaskan
water in 1989.
• In total, Exxon agreed to pay $900 million in civil claims, $125 million for
criminal charges.
• And The total disaster and clean-up cost was over $ 2 billion
Environmental

• Gaz/s Guzzler Tax for Cars: is an example of another face of Polluters Pays
Principle;
• Tax applied in USA to cars with low fuel efficiency an aims to off-set the
amount of Air pollution that such vehicles cause in comparison with the
higher fuel efficient cars.
• The Gaz/s Guzzler tax is part of the Energy Tax Act 1978.

Environmental

• Corporate Average Furl Economy (CAFÉ): CAFÉ standards regulate how far a
car should be able to travel on a gallon of fuel;
• If a car fall short, the manufacturer may have to pay CAFÉ penalties.
• Unfortunately, some producers choose to pay penalty rather than fuel
efficient cars.

Environmental

• The Super Fund Law: intends to ensure that polluters pay for the clean-up of
these extremely hazardous and toxic sites, whenever possible, a polluter pay
for it.
• In the instance, when this is not possible, a superfund trust fund is available
for expenses connected with any cleanup of superfund sites.
• If the superfund site is owned by Government, then it is responsibility of that
government to cleanup rather than using superfund funds.

Environmental

• The Camp Lejeune Justice Act of 2022: Between 1953 and 1987, the US
government unknowingly or un-intentionaly (as stated in the court) supplied
contaminated water to service members stationed at Camp Lejeune;
• Marine Corps Base Camp Lejeune is 246 square miles United States Military
Training Facility in Jacksonville, North Caoline.
• The water was contaminated with industrial solvent Trichloroethylene (TCE)
and Perchloroethylene (PCE);
• Causes Carcinogens, Cancer, Parkinson and Multiple Myeloma diseases.

Environmental

• The Justice Act 2022 is a propose piece of legislation, may offer veterans the
chance to file a law suit against USA
• The Camp Lejeune Justice Act of 2022: is not truly a Polluters Pays Principle
but represent instance where legal tools, not taxes, could hold a large entity
responsible for pollution.

Environmental

• Disadvantage of Polluters Pays Principle:
• 1. Difficult to identify and track the polluter;
• 2. Difficult to administrate (high cost);
• 3. Difficult to gauge the impact of pollution as some are long-term and
horrific;
• A externality may not be harmful today but have horrific implications tomorrow

Environmental
Economic Incentives: The E3

• What is E3?
• Effectiveness,
• Efficiency, and
• Equity.
• The E3 is concept of Dr. Manzoor with no reasoning,
• but this is the actual evaluation of all measures (tax, charge, and permits) in
terms of their effectiveness in controlling negative externality (pollution in
our Firm F case), efficiency by means of cost effective measures to control
negative externality.

Environmental

• What is E3? Effectiveness
• Depends on the success of achieving the regulator’s objective in Pollution control;
• So, if the objective is to achieve the given level of emission,
• The quantity rationing through Marketable permits appears to be preferred
incentive scheme;
• If the risk associated with small increase in emission are assessed as high, the
prudent strategy would be to use marketable permits;
• But if the objective is to maintain certainty over cost of pollution control;
• Quantity rationing is not effective as price rationing through charge scheme
• However, in this case, the level of pollution is not certain – the opposite of
marketable Permits

Environmental

• What is E3? Efficiency
• Efficiency is desirable
• It implies that the regulator’s objective are achieved at lowest possible cost
• In principal, Quantity Rationing with Marketable Permits and Price Rationing
with Emission Charge are equally efficient;

Environmental

• Constraints: Emission Charge requires continuous data for monitoring;
• Constraints: Marketable Permits requires Trading and Organization Rules;
• With the large number of producers, Monitoring and Enforcement can be
expensive, but if there are no enough producers, there may be not enough
competition in permits, the market will be inefficient.

Environmental

• An experience from Market of USA it is revealed that Marketable Permits are
more cost saving than Emission Charge;
• This reflects that in developing and transition economies, limited capacities
and other factors associated with,
• Strengthen the case of Price Rationing with Product Charges (tax on output),
over quantity rationing with Marketable permits.

Environmental

• What is E3? Equity
• Economic incentive can influence the distribution of costs and benefits across the
members of the society;
• These distribution affects raise the issue of equity and fairness;
• So, Regulator or State (Government) must identify:
• Winners (Capturing benefits of clean environment)
• Loosers (Bearing the financial burden of system)
• For instance: Regulator can implicitly assign Right to Pollute by using:
• Charge (Emission Fee)
• Subsidy
• The financial burden are different in two mechanisms.
Environmental

• What is E3? Equity
• So, it is up to society (For subsidy) to provide a subsidy to increase his level
of pollution control (recall Pollution Abatement suggestion in place of
subsidy not to produce)
• In such way, producer operates, Jobs are protected, and economic growth is
promoted;

Environmental

• What is E3? Equity Vs Efficiency
• Equity and Efficiency often conflict with each other:
• What incase, a produce is inefficient, or the workers are inefficient.
• Protection in such case, will not increase the size of the economic pie.
• Example of PIA and Steel Mill may suit under this scenario;
• So, the question is How the Burden of on Producer can be analyzed:

Environmental

• Geographical Aspects affecting efficiency;
• So, a uniform charge will affect the competitiveness (local and exports);
• The Generalized Scheme of Preference (GSP) and GSP Plus is an example;

Environmental

• Relative Burden borne by whom:
• Producer;
• Intermediate good Supplier (Raw Material Supplier);
• Worker; or;
• Consumer

Environmental

• Depends on Who is in Power;
THE BURDEN OF INCENTIVE SYSTEM WILL FOLLOW THE PATH OF LEAST
ECONOMIC RESISTANCE
• For reference, please see following studies on next slide:

Environmental

THE BURDEN OF INCENTIVE SYSTEM WILL FOLLOW THE PATH OF LEAST ECONOMIC
RESISTANCE
• For reference, please see following studies:
• Trade and Compliance of Labour Standards in Global Supply Chains: A Case Study
of Pakistan, Friedrich Ebert Stiftung (FES) & Social Policy and development Centre
(SPDC) http://library.fes.de/pdf-files/bueros/pakistan/13953.pdf ; Author(s): Khalida
Ghaus, Manzoor H. Memon, and Muhammad Asif Iqbal
• Who Benefits from Trade? Friedrich Ebert Stiftung (FES) http://library.fes.de/pdf-

files/bueros/singapur/13430-20180403.pdf Findings on the link between trade and
labour Standards in the garment, footwear and electronics industries in Bangladesh,
Cambodia, Pakistan, and Vietnam. Author(s): Muhammad Asif Iqbal and Manzoor
Hussain Memon
Environmental

• Depends on Who is in Power;
• Producer (Monopoly or Perfect Competition)
• Intermediate good Supplier (Perfect Competition or Substitution);
• Worker (Non-technical or abundant supply); or;
• Consumer (Substitution)
THE BURDEN OF INCENTIVE SYSTEM WILL FOLLOW THE PATH OF LEAST ECONOMIC
RESISTANCE

EnvEco Economic Incentrives Final Syllabus

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Environmental Economics

PART OF FINAL SYLLABUS

Economic Incentives: Public Response

Dr. Manzoor Hussain Memon

• Let us assume that:

• Firm ‘F’ won’t go beyond ‘FE’

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

O 0 Q – Pollution Reduction O 0 Q – Pollution Reduction

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Dr. Manzoor Hussain Memon

Economic Incentives: Public Response

Dr. Manzoor Hussain Memon

Economic Incentives: Public Response

Dr. Manzoor Hussain Memon

Economic Incentives: Public Response

O 0 Q – Pollution Reduction O 0 Q – Pollution Reduction

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

Economic Incentives: Public Response

• Means: value over time will reduced from FE to FI; FE

• In other words inflation lowers the real emission fee,

• The advantage of Cap-and-trade system is that no

Economic Incentives: Public Response

Economic Incentives: Public Response

Dr. Manzoor Hussain Memon

Economic Incentives: Public Response

Dr. Manzoor Hussain Memon

Economic Incentives: Public Response

Economic Incentives: Public Response

Dr. Manzoor Hussain Memon

Economic Incentives: Public Response

Dr. Manzoor Hussain Memon

Economic Incentives: Public Response

• The Point EA to EE, too much pollution

• The Point EA is considered to be an efficient

Economic Incentives: Public Response

Economic Incentives: Public Response

achieve a reduction of EE;

Economic Incentives: Public Response

• Then the efficient outcome would be EA;

pollution reduction (that is, EE > EA );

Economic Incentives : Public Response

• Then the efficient outcome would be EE;