Chapter 4

Monday, June 12, 2023 9:35 AM

Economics of Pollution
- Pollution is the introduction of contaminants that cause adverse changes into the natural
environment.
- Due to unchecked and rapid industrialization, pollution has become a serious issue after WWII in
developing countries.
- Types of Pollution:
○ Air Pollution: Sources of it include household combustion devices, motor vehicles, industrial
facilities, forest fires.
§ Some pollutants -- Carbon Monoxide, Ozone, Nitrogen Dioxide, Sulfur Dioxide.
○ Water Pollution: Occurs when pollutants are discharged directly or indirectly into water
bodies without adequate treatment to remove harmful compounds. Polluted water:
Domestic sewage, Industrial wastewater, Agricultural wastewater, Construction site storm
water, Urban runoff.
§ Pollutants -- Petroleum hydrocarbons, Plastics, Pesticides, Heavy Metals, Sewage,
Radioactive waste, Thermal effluents, Detergents, Chloroform, Food processing waste,
Lubricants, Storm water runoff
○ Light Pollution: Also known as Luminous or photo pollution. It is excessive, misdirect, or
obtrusive artificial light. Caused by degradation of photic habitat, alteration of natural light
levels in the outdoor environment, and excess indoor light.
○ Noise Pollution: Sources of Noise pollution could be Machines, Transportation systems
(motor vehicles, aircraft, trains), Poor urban planning
○ Littering
○ Soil Pollution: The presence of xenobiotic chemicals or other alterations in the natural soil
environment. It is caused by: Industrial activity, Agricultural chemicals, the improper
disposal of waste
§ Pollutants -- Petroleum hydrocarbons, Polynuclear aromatic hydrocarbons, Pesticides,
Lead and other heavy metals
○ Radioactive contamination
○ Thermal Pollution
- Classification of Pollutants can be made of different basis
○ Based on Absorptive Capacity: Stock Pollutants and Fund Pollutants
○ Based on Horizontal Dimension: Local Pollutants and Regional Pollutants
○ Based on Vertical Dimension: Surface Pollutants and Global Pollutants
- Efficient Pollution Abatement occurs at the point where Marginal Abatement cost (Marginal
Control cost, downward sloping curve) is equal to the Marginal Pollution cost (Marginal Damage
cost, upward sloping curve).
- Criteria for selection of pollution control instruments: Cost-effectiveness, Long-run effects,
Dynamic efficiency, Ancillary benefits, Equity, Dependability, Flexibility, Costs of use under
uncertainty, Information requirements.
- The marginal cost of abatement must be equalized over all abaters (emitters) and the result is the
least-cost theorem of pollution control. But generally, the least-cost solution is unlikely to involve
equal abatement effort by all emitters.
- There are various instruments used to achieve pollution abatement targets. These are their
categories
○ Institutional approaches: There are two variants to this approach, the improvement of
property rights and the encouragement of greater social responsibility. Some methods that
have an institutional approach include:
§ Bargaining: Coase explored the connection between property rights and the
likelihood of efficient bargaining solutions to inefficient allocation of resources.
 Proposed that well defined and enforced property rights were the key, also believed
non-trivial transaction costs.
Limitations:
- Well defined and enforceable property rights don't exist for many
environmental resources, particularly those that are open-access.
- Bargaining solutions require the expected gains to be greater than expected
costs of carrying out the bargaining, this means that it is facilitated by the
existence of a relatively small number of affected parties. Many environmental
problems don't fulfill these properties, so the scope for efficient bargaining is
restricted.
- Intertemporal bargaining is difficult or impossible.
Despite these substantial limitations, the absence of a supranational sovereign
institution means that there is often little to no alternative to bargaining solutions.
§ Liability Rules: Makes polluters internalize the cost they impose on others by making
them liable for the damage they cause by forcing them to compensate the victims of
their pollution.
○ Command and control instruments: Authorities simply mandate a certain standard of
behavior and then use some sort of enforcement strategy to enforce compliance. Types of
standards:
§ Ambient standards: Upper limit on the concentration of a pollutant in an environment
§ Emission standards: Upper limit of emissions from a pollution source
§ Performance standards: Upper limit on emissions per unit or some activity (per unit
of output or per unit of outflow).
§ Technology standards: specifies the technology sources that must be adopted to
control emissions.
Advantages: Certain outcome, Quick desired results
Limitations: Likely cost-inefficient, lack good dynamic incentives
○ Economic incentive instruments: Works by altering the structure of pay-offs that agents
face thereby creating incentives for individuals or firms to voluntarily change their behavior.
Some ways of that:
§ Emission charges: Each firm will independently reduce emissions until its marginal
control cost equals the emission charge, leading to a cost-effective allocation.
Difficulty is in deciding how high the charge should be in the first place. Knowledge of
both the aggregate marginal pollution damage function and the aggregate emissions
abatement cost function are necessary for achieving a socially-efficient emissions
target at least real resource cost to the economy as a whole.
§ Marketable emissions permits: There is a limit set on the total quantity of emissions
allowed by the regulator doesn't attempt to determine how that quantity is allocated
among individual sources, thus marketable permits.
• Cap and trade permit system: No firm is allowed to emit beyond the quantity of
(tradeable) permits it possesses, within a system that monitors emissions and
penalizes lawbreakers. A firm will try to purchase an additional permit
whenever the MC of abating emissions exceeds the permit price, which is
determined by the value of the aggregate marginal abatement cost at the level
of abatement in a market equilibrium situation.
- Initial location can be either via the selling of all permits by auction or the
allocation of permits at no charge but with a distribution rule.
- Marketable permits have significant effects on the distribution of income
and wealth between firms.
• Emission reduction credit (ERC) system: A baseline of allowable emissions is
established for both and aggregate and individuals sources. If a source emits
less than its baseline, it earns emission reduction credits that can be sold to
other sources or used to exceed baseline emissions later on without penalty.
Advantage: It allows a given total quantity of emissions reduction to be
achieved at lower total cost because of the ability to make offset
arrangements.
Limitations: The EPA may no longer be certain that net emissions are
actually being reduced. We can't guarantee if emissions reductions taking
place are genuinely additional (wouldn't have taken place if not for the
permit system).