Lecture Note

For Undergraduate Students

 Cont’d Subject Contents

CHAPTER – 5: Economics Of Pollution Control And

Environmental Policy
5.1. Pollution: Definition and Classification
 Definition and Classification of Pollution
 Classification of Pollutant and Pollution
5.2. The efficient allocation of pollution
 The case of stock pollutants
 The case of fund pollutants
5.3. Environmental policy Instruments

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5.1. Definition and Classification of Pollution
Pollution: Definition and Concept
 Pollution is a process in which waste that has been disposed off in the
air, in water or land, and that reduces the value of those resources in
alternative uses.

 Env't Pollution is the addition of contaminants into the natural env’t

that causes detrimental effects to nature, NRs and mankind

 Pollution may be defined as the presence/release of certain substances

(harmful env’ntal contaminants) beyond the absorptive capacity of the
earth.
 In biological terms pollution is said to occur when some metabolic change
is observed in animal or other populations and which would not have
occurred otherwise.
 In economics, however, pollution is only significant when the utility of
one or more individuals is reduced by the pollutants in question.
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 Hence, any unnatural and negative changes in all the dimensions like
chemical, physical and biological characteristics of any component of
the ecosystem i.e. air, water or soil which can cause harmful effects on
various forms of life and property is called environmental pollution.

 Any substance that cause pollution is called pollutants; and most of

these pollutants (that cause pollution) are naturally present in the
env’t in low concentration, and are usually considered to be harmless.

 Thus a particular substance is considered as pollutant only when its

concentration is relatively high and cause adverse effects.

 Even relatively kind products of human activity are liable to be

regarded as pollutant, if they precipitate negative effects later on.

 For example, although the substances themselves are not harmful ,the
nitrogen oxides produced by industry are often referred to as pollutant. In
fact, it is solar energy (sunlight) that converts these compounds to smog.
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Taxonomy of Pollutant and Pollution
 Generally, pollutants are classified in to two as stock and fund
pollutants.
 Pollutants for which the env’t has little or no absorptive capacity are
called stock pollutants (PoP = Persistence organic pollutant).
 Examples are non biodegradable bottles, heavy metals such as lead,
plastics, nuclear wastes, and synthetic chemicals, .
 Pollutants for which the env’t has some absorptive capacity are called
fund pollutants NPoP = Non- Persistence organic pollutant).
 Example are organic substances.

 In different perspective, pollutants can also be classified as:

 Primary and Secondary pollutants
 Quantitative and Qualitative pollutants
 Man-made and Natural pollutants
 Non-Biodegradable and Bio-degradable pollutants

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Classification of Pollution
Essentially, there are different types of pollution. Yet, let wee focus on the ff:
i) Air pollution: It is the addition of harmful chemicals to the atmosphere.
 Alternatively, it can be defined as any atmospheric condition in which
substances are present at concentrations, above their normal ambient
levels, to produce measurable adverse effect on man, animal, vegetation or
materials.

 In fact, depending on the body constitution, a human being consumes 6–

13m3 of air daily or even more in cases of heavy physical loads .

 Therefore, pollutants spread rapidly and to far distances in the

atmosphere are the problem of atmospheric pollution

 The main AIR pollutants are: sulphur compounds, nitrogen

compounds, carbon compounds, halogenated organic substances, metals
and their compounds, aerosols and dust, radioactive elements
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Indoor Air Pollution (IAP):
 Apart from outdoor air pollution, IAP that results primarily from
combustion of biomass (e.g. firewood, animal dung, crop residue) and fossil
fuels (e.g. kerosene) in traditional cooking stoves in rural and urban areas,
is a major concern in many developing countries.
Components of air pollution problem

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ii) Water pollution: Water is polluted if certain substances or physical
factors affect the quality of water and functioning of ecosystem and as a
result, the use of water for particular purpose is restricted
 Water pollution is not only confined to surface water but also spread to
groundwater, sea and ocean.
 Water pollution sources are classified in to two as:
 Point source pollution: includes
o agricultural wastewater
o oil and oil product pipelines
o pipes for draining treated or untreated urban or factory wastewater into
reservoirs, rivers, lakes and seas
• Non-Point source pollution: these sources are dissipated, and it is
much more difficult to identify and assess them. Typically includes,
• runoff from agricultural fields
• drainage from landfills
• surface runoff from building areas
• runoff from abandoned and active mining sites and quarries

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iii) Soil pollution: addition of unwanted substances to the soil w/c
negatively affects physical, chemical and biological properties of soil and
reduces its productivity is called soil pollution.
 The factors which disturb the biological balance of the soil and
deteriorate the quality, texture and mineral content are called soil
pollutants

 Sources of soil pollution

 Industrial waste: lead, cadmium, mercury, alkalies, organic substances and
chemicals.
 Agricultural waste: fertilizers, pesticides, insecticides and manures.
 Discarded materials and radioactive elements and plastic bags.

 Control measures
 Afforestation, reforestation and use of organic farming.
 Solid waste management and reduction of waste from the construction area.
 Stop the use of plastic bags and use bags of degradable materials like paper
 Biomedical waste should be collected and incinerated in incinerators.
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iv) Sound Pollution: When unpleasant noise is created by machines or
people which is annoying, distracting and physically painful then it is
called noise pollution.
 In fact, sound is measured in decibels (dB), a person’s hearing can be
damaged if exposed to noise levels over 75 dB over a period of time.
 WHO recommends 30 dB sound levels for indoor.

 Sources of sound pollution

 Indoor sources
 It includes noise produced by radio, television, generators, electric
fans, air coolers etc.
 Due to the higher population, industries and transportation, effects of
noise pollution is more in cities.

 Outdoor sources
 It includes loudspeakers, industrial activities, automobiles, rail traffic,
aero-planes and activities in social, and religious places etc.
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 Cont’d
V) Radioactive Pollution: is a phenomenon of emission of alpha, beta and
gamma rays due to the disintegration of atomic nuclei of some elements.

 Radioactive pollution is the pollution caused on account of the release

of radioactive substances or radiations in the env’t.

 There are many ways of radiation pollution like nuclear wastes from
nuclear power plants, mining and processing of nuclear material etc

 Radiations are mainly of two types: Non-ionizing radiations and

Ionizing radiations.

 Sources:
 Natural sources: cosmic rays from space and terrestrial radiation in
earth’s crust etc.
 Man-made sources: nuclear power plant, disposal of nuclear waste,
nuclear transportation, uranium mining and nuclear weapons etc.

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5.2. The efficient allocation of pollution
 Since it is hardly possible to have zero level of pollution, we
should have to determine the optimum level of it to protect the
environment.

 The economic theory provides the technique how firms allocate

pollution optimally using the economics of pollution control.
 The efficient allocation of pollution requires the fulfillment of a
competitive market assumption.
 Yet, in reality, markets fail to allocate resources efficiently.

 Even if, the efficient levels of policy instruments can be easily

defined using economic theories, they are very difficult to
implement in practice.
 To implement, hence, we must know the level of pollution (each
source of pollution emit); but asymmetric information imposes an
unrealistically high information burden on control authorities.

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 Do you recall how we determine the efficient allocation of resources
from your course of Microeconomics?

 The efficient level pollution (or the optimal level of pollution) occurs
where the marginal abatement cost (MAC) is just equal to the marginal
damage cost (MDC).

 Definition: the marginal abatement/control cost (MAC) is the cost of

abating or controlling an extra unit of pollution. It is also known as the
marginal control cost.

 NB. there is a negative/inverse relationship between MAC and the

quantity of pollution. The higher the MAC, the lower the quantity of
pollution; and vice versa.

 Graphically

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 Definition: The marginal damage cost (MDC) is the health or env’tal

damage caused by an extra unit of pollution it is also known as the
marginal pollution cost.

 NB. there is a positive relationship between MDC and the quantity of

pollution; means the higher the quantity of pollution, the higher the
MDC, and vice versa.

 Graphically,
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 Cont’d

 So, efficient allocation of pollution

occur when MAC equals to MDC.

 Graphically, efficient pollution occurs

at the intersection of the MAC and the
MDC curves, such as at point Q* in
the graph below.

 NB. the MDC doesn’t start at

zero but at positive amount of
pollution! WHY?

 Because of the ability of the env’t to

assimilate certain amount of
pollution without any damage

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 Cont’d

 At points less than Q*, say at point A above, it is the case that amount spent
on controlling pollution (MAC) is greater than the damage due to pollution
(MDC).

 Hence, the incentive is to reduce the amount spent on controlling pollution,

(i.e., MAC), thereby raise the quantity of pollution and move towards Q*.

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 Cont’d

 On the other hands, at points greater than Q*, say point B above, it is
the case that the damage caused by pollution (MDC) is greater than
the amount spent on controlling pollution (MAC).

 Therefore, the incentive is to reduce the damage, MDC, by reducing the

quantity of pollution, and move towards Q*.

 Hence, equilibrium will occur at Q*, where MAC = MDC, because that
is where the market forces of MAC and MDC will be balanced such
that there is no incentive to change.

 Recall that Equilibrium is a situation where market forces are

balanced such that there is no incentive to change.

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 The Ecologist operates at X because they have zero tolerance for
damage due to pollution.

 The Capitalist, on the other hand, operate at Y because it is cheaper to

pollute than to have pollution abatement.

 Therefore profit maximization dictates that private incentive is where

zero amount is spent.
 This has a profound implication for policy; unless we control them,
capitalists do not care about the adverse effect.

 The economic optimum occurs where MAC =MDC (or at Q*). At this
point, the damage is not zero, nor the amount be paid for contorting
is zero.
 The diagram suggests that, the optimal level of pollution is not
zero.
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5.3. Environmental Policy Instruments
 As we discussed earlier efficiency is achieved when the marginal cost of
control (MCC) = Marginal damage cost (MDC) caused by the pollution
of each emitter.
 However, while the efficient levels of policy instruments (by setting
Q*) can be easily defined in principle, they are very difficult to
implement in practice.
 To implement, we must know the level of pollution at which the two marginal
cost curves cross for every emitter.
 That is a tall order, one that imposes an unrealistically high information
burden on control authorities. Means, control authorities typically have
very poor information on control costs and little reliable information on
marginal damage functions.

 So, env’tal authorities prefer the cost minimization (or setting the
thresholds to select specific legal levels of pollution that provide
adequate margins of safety for human or ecological health) or the
cost-effectiveness criterion.
 The policy instruments to reduce pollution are:
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1) Emission standards (Command-and-Control)
 An emission standard is a legal limit on the amount of the
pollutant an individual source is allowed to emit.
 Emission standards are supported by enforcement or high punishment to
those violate the standard (the controlled quantity).
 Three commonly used command and control instruments are
A) Non-transferable emissions licenses: Once the EPA is committed to
attaining some overall emissions target for a particular kind of pollutant, and
after adopting some criterion for apportioning licenses among the individual
sources, the EPA distributes licenses to emissions sources. But, the licenses
cannot be transferred (exchanged) between firms: each firm’s initial
allocation of pollution licenses sets the maximum amount of emissions that
it is allowed.
B) Instruments which impose minimum technology requirements: it is
specifying required characteristics of production processes or capital
equipment used. In other words, minimum technology requirements are
imposed upon potential polluters.
C) Location: dislocation of peoples form pollution place or vice versa
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 Cont’d
2. Economic incentive instruments: Command and control instruments
operate by imposing mandatory obligations or restrictions on the
behavior of firms and individuals. But, this instruments work by creating
incentives for individuals or firms to voluntarily change their behavior.

 Economic incentives allow decentralized decision making, giving greater

freedom to firms and plants how to comply.
 The taxonomy of economic incentive instruments are
A) Charges, Fees or Taxes: There are prices paid for discharges of pollutants to
the environment based on the quantity and quality of the pollutant(s). To be
most effective the charge is levied directly on the quantity of pollution.

B) Transferable (tradable) emission permits: here 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 through trade.
The control authority issues exactly the number of permits needed to
produce the desired emission level.

C) Subsidy: Where taxes and charges used as a penalty on discharges, subsidies

can be used to reward the reduction of discharges in a similar manner.

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D) Deposit-Refund Schemes: under these schemes, a surcharge is levied on a
product at the point of payment. When pollution is avoided by returning the
product, or its polluting components, to a specified collection stream the
surcharge is refunded. These economic instruments have been used for
drinks containers, batteries and packaging.
5.4. Trans-boundary Environmental Problems
 It is reading assignment

 Trans = Across, Beyond; Boundary = National Borders; it refer to cases in

w/c pollution created in one country “moves” across national boundaries.

 Some env’tal problems (such as ozone layer depletion, loss of biodiversity,

and climate change) span a country’s borders and are felt regionally and
globally.

 Trans-boundary env’tal problems can be solved only by Multilateral

Environmental Agreements (MEAs).
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 End of . . .
. . . Chapter -5

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