Economic Solutions to Pollution.

Week 4
Pacific Context

 https://www.youtube.com/watch?v=EcfxPCwIjTU
 https://www.youtube.com/watch?v=2D1bSg6gXBc
 After studying this unit, you should be able to:
Discuss why it is important to determine appropriate
levels of waste and pollution.
Explain two alternative point of views, (i)environment
capacity and (ii)economic efficiency, in determining the
appropriate levels of waste and pollution.
Explain the difference between stock and fund pollutants
and the environmental goal for each pollutants.
 Introduction
The core of the relationship between the environment and the
economic system is goods consumption and waste production.
• On one side there is a flow of goods, services and energy from
the environment to meet the human needs.
• On the other side there is a flow of waste and pollution from
the economic system (humans) to the environment.
• The flow of waste and pollution also have a feedback effect on
the flow of inputs from the environment to the economic
system.
 Introduction
From the waste feedback on the ability of the environment to
provide goods arises the need to control the level of waste and
pollution.
QUESTION:
What is the appropriate flow of waste and pollution to the
environment?
Addressing above answer involves trade-offs for
consumption decisions.
 Introduction
In order to address the question, we analyze 2 alternative
points of view:
• Environmental capacity
• Economic efficiency
In both cases we need a general framework or model to
understand the dynamic of the relationship between the
economic system and the environment.
I. Environmental Capacity
The appropriate level of pollution will depend on the capacity of
the environment to assimilate such a level of pollution.
• For example, the ocean assimilates more waste than a river or
a lake.
The flow of waste and pollution in the environment will
confront the ability of the environment to assimilate it.
If this capacity is overpassed then waste will start to accumulate.
I. Environmental Capacity
Flow of waste:
• One part is assimilated by the environment
• One part is accumulated in the environment
• Before being accumulated or assimilated, one part affects the
environment’s:
• Natural balance
• Ability to produce more goods and services
The flow of pollution will create a negative feedback effect on
the environment’s capacity to provide goods and services.
I. Environmental Capacity
Absorptive capacity: ability of the environment to absorb pollutants.
• If the emission load exceeds the absorptive capacity, then the pollutant
accumulates in the environment
Stock pollutants: are pollutants for which the environment has little or no
absorptive capacity
• For example, non-biodegradable waste, like plastic bottles, heavy
metals
Fund pollutants: are pollutants for which the environment has some
absorptive capacity
• ONLY accumulate when the absorptive capacity is lower that the
pollution flow.
I. Environmental Capacity
In practice, both STOCK and FUND pollutants may
accumulate in the environment.
Pollutants by zone of influence:
Horizontal: Analysis of local versus regional scale of influence.
• Local pollutant will be experienced near the source of
pollution.
• Regional: effect will be experienced at long distances from the
source.
• Global pollutant: affect the entire planet.
I. Environmental Capacity
Vertical: whether the damage occurs at ground level or at the upper-
atmosphere
• Ground level: like particulate matter, lead
• Upper-atmosphere: like greenhouse gases
Absorptive capacity: This depends on the nature of the pollutant.
• Stock pollutant
• Fund pollutant
In both above cases, if the absorptive capacity is overpassed, the
pollutant will accumulate.
I. Environmental capacity
 Stock pollutant: its impact persist in the long run and will challenge the options of
future generations. Even after stop polluting the stock of pollutant will remain and also
its impacts.
I. Environmental Capacity
Fund pollutant: The environment could be able to assimilate the pollutant
if the load decrease or stop.
I. Environmental Capacity
The impact on the environment: the load of pollution may affect
negatively the capacity of the environment to supply goods and services
(negative feedback).
These impacts may be reversible or irreversible.
The impacts may be on:
• Life (Living natural resources, included humans)
• Soil
• Water
• Air and also the climate (air at global scale)
• Exhaustible resources (mineral, petroleum)
I. Environmental Capacity
Some concepts (Perman et al., 2011) :
• Ecology: is the study of the distribution and abundance of
plants and animals.
• Ecosystem: an interacting set of plant and animal populations,
together with their abiotic (non-living) environment.
• Stability: is the propensity of a population to return to some
kind of equilibrium following a disturbance.
• Resilience: is the propensity of an ecosystem to retain its
functional and organizational structure following a
disturbance.
I. Environmental Capacity
Some concepts (Perman et al., 2011) : – Ecological footprints:
(Humanity's ecological footprint‘) the ecological impact of the
human species.
• Biodiversity: the number, variety and variability of all living
organisms in terrestrial, marine and other aquatic ecosystems
and the ecological complexes of which they are parts.
• Biodiversity is intended to capture two dimensions:
• the number of biological organisms
• their variability.
• https://www.youtube.com/watch?v=KPn3lAJyG7A
Figure: Alternative responses of the environment to a
disturbance
Figure: Stability of the environment to disturbances, e.g.,
pollution
I. Environmental Capacity
The negative impacts will affect the environment’s capacity to provide:
Exhaustible resources
• Minerals
• Petroleum- Energy
Renewable resources
• Biological
• Fisheries
• Forests
Energy?? (Solar Energy.)
I. Environmental Capacity
Goods and services from the environment constitute sub-
systems that must be analyzed from a dynamic point of
view.
Dynamic refer to the inclusion of “time” as a decision
variable
Thus, the decisions “today” may affect the availability
“tomorrow”.
I. Environmental Capacity
Resources may also be classified as stock and flow
resources
• Flow resources: no link between current use and future
availability.
• Stock resources: level of current use does affect future
availability.
II.Economic Efficiency
Economic efficiency has to do with maximizing the difference
between the social benefit and social cost of an economic
activity, policy, or project.
Pollutants are the residuals of production and consumption.
In order to minimize the environmental damage an efficient
allocation of pollution must be defined.
This also must consider the dynamic nature of the problem (time
as a decision variable)
II.Economic Efficiency
Dynamic efficient allocation (Stock pollutants): the one that
maximizes the net present value.
That is the present value of benefits received from
consumption X in year t minus the cost of the damage caused
in the environment (in t and the cumulative damage over
time).
• Note that environmental damage of stock pollutant remain
over time.
• Therefore stock pollutants create burdens for future
generations.
• Note the intergenerational equity problems.
II.Economic Efficiency
Static efficient allocation (Fund pollutants): analyzed from the
perspective of minimizing cost (depending on the point of view
is also a CBA).
Assumption 1: The disturbance is inside the limits of resilience
of the environment.
• Thus, it may get recovered from the load of fund pollutants.
• Opposite case, the disturbance goes beyond the threshold of
resilience then we analyze the situation as a dynamic
allocation problem.
II.Economic Efficiency
Assumption 2: The environmental damage is reversible in the short run.
Assumption 3: The level of marginal social cost of pollution (MSC)
increases exponentially (or in quadratic way) with the level of pollution.
Assumption 4: The level of marginal cost of abatement (MCA) of
pollution is also exponentially increasing with the level of abatement.
The optimal social level of pollution is obtained when the MSC of
pollution equals MCA
II.Economic Efficiency
Certain level of pollution (E0 ) will result in social damages that
pollution creates by degrading the:
• physical,
• natural, and
• social environment.
We identify a Marginal Social cost of pollution (MSC) and the
area below as the total social cost of pollution (are in red, i.e., the
integral of MSC)
Figure: Total cost of level of pollution E0
Figure 5.5 Component
Relationship of the MSC (Khan,
2005)
II.Economic Efficiency.
The marginal damage function is useful for thinking about the
relationship between environmental change and social welfare.
The increasing slope of the marginal social cost (MSC) indicates
how damage changes with each additional unit of pollution.
An upward sloping marginal damage function indicates that as
the level of pollution becomes larger, the damages associated
with the marginal unit of pollution become larger .
II.Economic Efficiency.
One alternative could be zero pollution
Zero pollution is not possible for two reasons:
• The reduction of pollution will have opportunity costs.
• The Law of Mass Balance makes a choice of zero
physically impossible.
The Law of Mass Balance states that the mass of outputs
of any activity are equal to the mass of inputs.
II.Economic Efficiency.
Any consumption or production activity must produce waste.
the cost of reducing pollution includes the opportunity costs of resources
used to reduce pollution and the value of foregone outputs.
Abatement costs include:
• Labor
• Capital
• Energy needed to lessen emissions
• Opportunity costs from reducing levels of production or consumption.
Figure: Pollution Control Model: Fund Pollutant
II.Economic Efficiency.
The alternative: is to find an equilibrium between the level of pollution
that society can afford in order to obtain a certain level of consumption.
Confronting the cost of abatement and the social cost of pollution in
marginal terms, will result in an optimal level of emissions (E*)
E* results from Marginal analysis, which is useful when a choice must
be made about which level to choose from a potentially infinite
spectrum.
Optimal level of pollution minimizes the total social costs of pollution (the
sum of total abatement costs and total damages).
Figure: Pollution Control Model: Fund Pollutant
II.Economic Efficiency.
As better we could know the MSC and MCA,
better will understand the E*.
In real life, knowing the level of pollution E* is too
difficult.
The central planner (or policy maker) see the
efficient or optimal level of pollution as the
environmental goal to reach.
II.Economic Efficiency.
A greater or lower level of pollution would result in an
inefficient level of emissions.
Figure: Social Cost of pollution when pollution level is greater than
optimal
Figure: Social Cost of pollution when pollution level is lower than
optimal
II.Economic Efficiency
Social Costs of Pollution are negative externalities.
Abatement cost are assumed by the firm (not externalities).
Firms that attempt to control pollution are placed at a
competitive disadvantage.
II.Economic Efficiency
The market fails to generate the efficient level of
pollution control and penalizes firms that attempt to
control pollution.
The environmental authority will (should) use this
optimal level of pollution as the goal to reach.
Therefore, all the environmental policies will be dealt by
E*
Figure: Pollution Control Model: Fund Pollutant