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Economics of Pollution Control

Economics of Pollution Control

CH. 14Part II

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Market Allocation of Pollution

When firms create products, rarely does the process of converting raw material into outputs use 100 percent of the mass.

Some of the mass, called a residual, is left over.

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• If the residual is valuable, it is simply reused.

• However, if it is not valuable, the firm has an incentive to deal with it in the cheapest manner possible.

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• The typical firm has several alternatives.

• It can control the amount of the residual by using inputs more completely so that less is left over.

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• It can also produce less output, so that smaller amounts of the residual are generated.

• Recycling the residual is sometimes a viable option, as is removing the most damaging components of the waste stream and disposing of the rest.

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• When pollutants are injected into water or the air, they cause damages

• These costs are not borne by the emitting source and hence not considered by it (are borne by society at large)

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• The disposal of wastes into the air or water becomes inefficiently attractive.

• The firm minimizes its costs when it this way

• What is cheapest for the firm is not cheapest for society.

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• In the case of stock pollutants: Uncontrolled markets would lead to an excessive production of the product that generates the pollution

• Too few resources committed to pollution control, and an inefficiently large amount of the stock pollutant in the environment.

• The burden on future generations would be inefficiently large.

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• The inefficiencies associated with pollution control and the inefficiencies associated with the extraction or production of minerals, energy, and food exhibit some rather important differences.

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• For private property resources, the market forces provide automatic signals of impending scarcity.

• When private property and open-access resources (fisheries) sell in the same market, the private property owner tends to improve the excesses of those who utilize open-access properties.

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• With pollution, no automatic improvement mechanism is evident.

• Because this cost is borne partially by innocent victims rather than producers, it does not find its way into product prices.

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• Firms that attempt unilaterally to control their pollution are placed at a competitive disadvantage; due to the added expense, their costs of production are higher than those of their competitors.

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• Not only does the uncontrolled market fail to generate the efficient level of pollution control, but also it penalizes those firms that might attempt to control an efficient amount.

• Hence, the case for some sort of government intervention is particularly strong for pollution control.

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Efficient Policy Responses

• Efficiency is achieved when the marginal cost of control is equal to the marginal damage caused by the pollution.

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• Each emitter should control its pollution until the MC of controlling the last unit is equal to the marginal damage it causes.

• One way to achieve this outcome would be to impose a legal limit on the amount of pollution allowed by each emitter

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• If the limit were chosen precisely at the level of emission where marginal control cost equaled the marginal damage, efficiency would have been achieved for that emitter.

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• An alternative approach would be to internalize the marginal damage caused by each unit of emissions by means of a tax or charge on each unit of emissions (Read Example 14.1).