Lec-7Urban Pollution

Engr. Dr. Attaullah Shah

Pollution • DEFINITION: The absorptive capacity refers to the environment's ability

to absorb waste products.• If emissions exceed the absorptive capacity of the system, they will

accumulate in the environment and cause damage.

• DEFINITION: A fund pollutant is a pollutant for which the environment has some absorptive capacity. Examples: Carbon dioxide , waste paper products

DEFINITION: A stock pollutant is a pollutant for which the environment has little or no absorptive capacity. Examples: Nonbiodegradable bottlesHeavy metals (e.g., lead) and Some synthetic chemicals (dioxins and PCB's)

Pollution-A global issue• Urban pollution has reduced the quality of life for many decades.• The effects of pollution on air and groundwater is well known• Besides local effects, the global effects like Global Warming Climate Changes etc • With the green and Clean technologies in developed countries, it is less severed but in developing countries like Pakistan, the problem of pollution is more severe. • Air pollution is one of the major urban problems today and it is important to understand the policies aimed at reducing it • The present pollution level in the developing countries is not socially optimal• Direct regulations of factory’s pollution’s level is one of the way to eliminate pollution. Another way is to levy pollution tax. Bargaining between the firm that owns the factory and

the neighborhoods' residents, which may lead to socially optimal level in some cases.

• Consumers living in desirable region must pay for the

The Marginal damage and Marginal benefit Curve• Let’s we assume that the pollution from the factory is P• The pollution affects the life of people around by causing their health

problems, soils their cars, roofs, and cars becomes visually unappealing

• Lets the damage caused by the pollution P is D(P)

• The damage from additional unit of pollution is given as “Marginal Damage” function ,MD(P) . The function is drawn in Fig which shows that the damage is increasing with the pollution growth. The damage used by any level of pollution P’ is given by area under the curve at P’

• The marginal benefit from pollution would decrease . At pollution P, the height of the curve shows the benefit (profit) from producing additional unit of pollution from that point, a benefit that comes from lower abatement cost. If P would reduce, the cost of abetment would increase and profit would fall.

• If the firm spend nothing on pollution abatement, the first unit generated is easy to treat. But for further reduction in the pollution, the abatement cost would increase and the abatement cost between two levels is area of the curve under these two points A. This also shows the benefits when the pollution is increased from lower to higher level. Hence it gives the benefit when the pollution is increased and the abatement cost when the pollution is reduced.

• The cost of complete clean up is A+B. Hence for the firm to go pollution level P’ from complete clean up is also A+B. How?

•For the firms that owns the factory additional pollution is beneficial as cleaning up pollution is costly, hence the additional pollution will make the firm spend less on the pollution abetment, leading to increase in profits. This is shown in MB(P) curve.

• The additional unit of pollution is desirable from the society’s point of view as long as the benefits to the firm from the additional unit exceeds the damage to the consumer i.e. as long as the MD curve is above the MD curve.

• Thus at P=0, pollution should be increased upto the points where MB=MD. Hence at level P”, the benefits from the additional unit of pollution equals the damage to the society and hence it is socially optimal. This is well below the free pollution level.

• The social loss to the population E+F and the benefit to the firm is E and the damage exceeds the benefits, which represents “ Social Surplus” in moving from social optimum level to free pollution level.

If there is penalty for the pollution. The firm would continue to generate pollution till point when the marginal benefit from the additional pollution is zero. This may be “Free Pollution” level for the firm.

This doesn’t take into account the damage to the neighborhood , hence this level of pollution selected by the firm at “ Free Pollution” is not socially optimal

Why pollution to certain level is desirable?

• The complete Clean up is an ideal situations where the cost of cleanup of the last pollutions are very high at one hand and the damage to the society is very low . Hence it is optimal to tolerate these pollutant units

• In other sense if the total income of the firms is divided amongst the residents living around the firms. Hence the benefits from the additional pollutions will be distributed amongst the residents as dividends . This will also create dollar damage to the residents. The residents would tolerate the pollution unless the benefits

• The highest surplus level is A at P=P* , when the total benefits = A+C and total damage incurred by the residents is C.

– Regulating by establishing Pollution Standards (NEQS), equal to socially optimal level P*. For this purpose a lot of work involving hiring the medical experts to determine the cost of health related problems etc will be required and also the benefits to the firm to draw the two curves and ultimately determine the P*, the value at the intersection of MD and MB

– The pollution tax may be levied to regulate the pollution externality. The Pigovian Tax may be a mechanism, after British Economist Pigou. The firm will be charged t tax per unit of pollution and hence for pollution of P, the tax is tP

– The marginal benefit at any pollution level = MB-Pt. The firm in the of tax would set MB=0 but now with tax it will set MB-t=0. or MB=t but this is the case at P=P*, which is socially optimal level. The Govt would need to do the same types of exercise to come up with the P*

As Corporate Social Responsibility (CSR), the firms pay attention to their pollution level in the developed country to avoid damage to their image. Though the firm don’t go to unrestrained level yet the social optimal level can’t be achieved without Govt. interventionThere are two ways of Govt. interventions:

• As another tax scheme, the Govt. instead of fixed tax would levy tax regimes for various ranges of pollution

• The tax liability is set at total damage hence the liability for level will be D(P) the area under the MD curve up to P. The additional unit of pollution would bring the tax equal to MD.

• Hence the firm marginal benefit from additional unit of pollution =MB-MD and the firm would increase pollution unless MB=MD, which is the socially optimal level.

Bargaining the path of Social Optimal The Coase Theorem

• Coase (1960) proposed that bargaining between those affected by an externality and those affected can lead to socially optimal situations

• Two basic conditions put forth by him were: – The cost of engaging in bargaining must be small . .i.e. If only few

people are affected by an externality and single part y generates it. But in case many people are affected and there are many parties creating these externalities, the cost of bargaining can be very high.

– The second requirement is “ Property Rights” i.e. The firm has the right to pollute and the residents have the right to clean air. Hence the status quo will pave ways for the bargaining

• When the firm has right to pollute, it will set the pollution at Free Pollution, when no tax is to be paid and the firm produces highest level of pollution. This residents will try induce the firm to reduce the pollution to certain level and will pay certain money for that as right of the firm.

• If the residents have rights to clean air, then the firm will be obliged at P=0 level, and the firm will induce the residents to certain agreed level of pollution by making cash payments to them

• In case there is no clear property rights with both sides, the firm would chose the Free Pollution level and the residents will try to reduce it. The firm would demand some payment for pollution reduction, which will not be acceptable to the residents and hence the bargaining would start

-Suppose that the firm has the right to pollute Hence to eliminate one unit of pollutants, the residents would pay equal to the height of MD curve at P= . The firm would like to reduce the pollution unless the height of the MD is more than MB and the pollution reduction cost will be paid by the residents. This will continue till MD=MB and the residents would not pay beyond that and this is the point of socially optimal pollution level.- In case the firm is strong bargainer and residents are weak, then the firm pays Z for moving from P=0 to P* The residents gain nothing and the firm gain social surplus of Y , which equals the abatement cost Y+Z minus the payment Z. In all these cases, it is observed that the pollution level is socially optimal.-The Coase theorem states that when externality are present and rights are assigned, the bargaining would lead to socially optimal level.

• The implementation of the pollution tax based on individual tax and the affected neighborhood, is not practicable. The Govts. have instead relied on the direct regulations.

• By implementing Automobile emission Standards and Fuel efficiency and economy standards in US have reduced the air pollution and combustion of fuels.

• To reduce pollution from stationary source, the Cap and Trade system is used in US and Europe. Here the Govt first decides the lelve of pollution that can be tolerated in a particular area and then the firm are given certificate for creating pollution on payments. Hence the Co power plant would buy exactly the unit equal to its pollution level.

• The pollution rights are traded by the Govt. equal to the pollution level decided. These rights are further traded amongst the firms. The clean firms and factories would sell their right to the dirty firm and so on

• The 1990 Clean Air Act introduced Cap and Trade system for regulating the emission of SO2 from US power plants using fossil fuels and reduce the Acid Rains in the Eastern USA. For 261 plants over the 21 sates, the pollution rights were given and the total pollution was progressively decreased to 50 level in 2007 relative to 1980 lelvel.

• The harm due to pollution can be in one way measured by consulting the health experts

• The information from housing market can also help in this regards, as the consumers or urban residents if harmed by the pollution will not pay as much for a house for a polluted areas than clean areas.

• This can be measured as hedonic price, as the estimated price differential can be measured as dollar value for the good air quality

• The regression equation incorporating the pollution of the areas, can be developed to determine the equation for housing price in an area.

• The result of research by Chay and Greenstone (2005), shows that 1 percent increase in pollution reduces the value of houses between 1/5 to 1/3 . Hence the authors have reinforced tougher Air Quality Standards (AQS) over 1970 lelvel .

• This will increase the property values of $45 billion

The Hedonic Price Method (HPM)• In assessing the housing prices by hedonic model, type of construction,

number of rooms, size, years of construction, etc. are important , but also location aspects – neighbourhood characteristics, easy access to shopping areas, schools, hospitals, parks, distance to work and, in particular, environmental quality.

• The fundamental hypothesis of this approach is that environmental changes, as a result of a program for environment improvement, affect the flow of future benefits and consequently property value. In other words, environmental improvements alter property prices.

• The HPM is derived from the theory of value developed by Lancaster (1966), Griliches (1971) and Rosen (1974) (apud Hanley and Spash, 1993

• The theory of hedonic prices assumes that the utility of each individual is a function: of the individual consumption of a composite good - X; a localization vector of specific environmental amenities – Q; a vector of structural characteristics of the residential occupied by the individual - such as size, number of rooms, year and type of construction – named S; and a vector of characteristics of the neighbourhood where the residence is located – some examples are the quality of local schools, access to parks, stores, place of work and the criminality rate – N.

• According to these hypotheses, the residential price can be written as a function of its structure, neighbourhood and characteristics of environmental quality of its location. If Ph is the price of the residence, a function can be written as such: Phi = Ph (Si, Ni, Qi)

• The utility of an individual that occupies a residence is given by the following function:  u = u (X, Qi, Si, Ni)

• The hedonic price of pollution is give as:Ph = f (CHEIRO, RPC, AREA, ANO, DT, Q1, Q2, Q3, Q4, GAR, ELEV, FARM, PAD, AÇOUG, MERC, LIVR, REST, PG, BAR, SERP)

• Ph : Hedonic prices , CHEIRO : Environmental variable “bad smell”• RPC: Income per capita of the population living in the area of study • AREA : Total area of apartment/house, in m2

• ANO:Year of authorisation for apartment occupation (“habite-se”)• DT : Distance, in meters, from the building where an apartment is located to the ETE/North• Q1: One bed room apartment , Q2 : Two bed room apartment , Q3 : hree bed room apartment , Q4: Four bed room

apartment GAR : apartments with garage , ELEV: Building has elevator • FARM : A drugstore is located in the apartment neighbourhood • PAD bakery is located in the apartment neighbourhood, AÇOUG : A butcher shop is located in the apartment

neighbourhood, MERC : A fruit and vegetable market is located in the apartment neighbourhood , LIVR : A bookstore is located in the apartment neighbourhood

• REST: A restaurant is located in the apartment neighbourhood, PG , A gas station is located in the apartment neighbourhood BAR A bar with music is located in the apartment neighbourhood

• SERP :Public service facilities (schools, police offices, health centres, post offices and religious temples) are located in the apartment neighbourhood.  

• The Hedonic Price Method (HPM) is one of the oldest economic valuation method and one of the most used to analyse changes in the value of residential and commercial properties due to some environmental externality. According to the specialised literature, an individual when goes to the real state market to acquire a residence, he or she is not only buying a quantity of square meters of a certain quality; but also in doing his or her choice, he or she takes into consideration location and environmental characteristics of the asset. Thus in making his or her decision, perception of these characteristics means that the individual is somehow valuing these particularities of a residence.

• In this context, changes in parameters of environmental quality, such as the bad quality of air due to pollutant emissions by industrial units or to bad smell exhaled from landfills or sewage treatment plants, are captured by the real state market through property prices. The main goal of this paper was to evaluate possible effects that air quality has upon values of residential apartments located in the North District of Brasília, Brazil, through the application of the HPM. These effects were consequence of the bad smell exhaled by the operation of a sewage treatment station – ETE/North.

•

• As argued before, several functional forms were used to specify the hedonic price functions. The best econometric results were achieved using the linear form. Model I had the best statistical results, with a R2 of 0,9512; a F of 9769,05 indicating a highly significant regression model; and with a significance level of all variables of less than 1% by the test t, except for the variables GAR and AÇOUG who statistically were not significant.

• The variable SMELL, the main variable of our hedonic regression, had the expected sign in all models: negative. This empiric evidence ratifies the main hypothesis of this paper: the quality of the air has influence on the apartment value. Apartments located in the proximities of that sewage treatment station have relatively smaller prices, in relation to similar ones located in more distant areas.

• REF: Economics of air pollution: hedonic price model and smell consequences of sewage treatment plants in urban areas.

• Jorge M Nogueira. Bernardo P M Mueller (University of Brasília, Brazil)• Sergio Augusto Batalhone is Lecturer at the Catholic University of Brasília and Associated Researcher of

the Centre of Studies on Environmental and Agricultural Policy (NEPAMA), Department of Economics, University of Brasília (ECO/UnB).

• Jorge Madeira Nogueira and Bernardo Mueller are Professors in the NEPAMA/ECO/UnB. PRONEX/CNPq/MCT support and translation work from Portuguese to English done by Jorge Madeira Nogueira Junior are gratefully acknowledge.

The Convention on Long-range Tran boundaryAir Pollution, signed in Geneva in 1979, is alandmark international agreement. For more than 25 years it has been instrumental in reducingemissions contributing to transboundary air pollutionin the UNECE (UN Economic Commission for Europe) region through coordinated efforts on research, monitoring and the development of emission reduction strategies on regionalair pollution and its effects. As of 15 September 2007, 51 member states of UNECE and the European Community were Parties to theConvention. Please read the above report and explain the pollution abatement strategies adopted in Europe

AIR POLLUTION ABATEMENT

Environmental Policy Choice: Pollution Abatement Subsidies• Per G. Fredriksson : University of Louisville - College of Business - Department of Economics

Zoe Ratcliffe: University of Adelaide - Centre for International Economic Studies (CIES)Resource and Energy Economics, Vol. 20, No. 1, pp. 51-63, 1998

• Fredriksson, Per G. and Ratcliffe, Zoe, Environmental Policy Choice: Pollution Abatement Subsidies. Resource and Energy Economics, Vol. 20, No. 1, pp. 51-63, 1998. Available at SSRN: http://ssrn.com/abstract=269977 Abstract: The purpose of this paper is twofold. First, we show that pollution abatement subsidies, defined as subsidies on the inputs to pollution abatement, are inefficient instruments for pollution control. Whereas these types of subsidies are used in practice, the existing literature analyses only subsidies to reductions in pollution from a base level. Second, we show how pollution abatement subsidies arise endogenously in a model with environmental and industry lobby groups, although an efficient pollution tax is feasible for the government. We predict the political equilibrium abatement subsidy and pollution tax levels, and argue that pollution abatement subsidies serve primarily as methods of redistribution. The paper employs a menu auction model developed by Bernheim and Whinston (1986) and Grossman and Helpman (1994).Industry and environmental lobby groups offer the government prospective campaign contributions corresponding to different tax-subsidy policies in order to influence the policy outcome. The intuition for how a positive equilibrium subsidy may arise despite being inefficient is the following. Imagine that we begin with the social optimum; a Pigouvian tax and a zero subsidy. If total pollution is decreasing in the subsidy rate, the subsidy benefits the environmentalists. The industrialists always gain from receiving the subsidy. The remaining groups in society pay a share of the subsidy, but derive no utility from it. Total welfare declines when we move away from the social optimum, but aggregate payoffs of the lobby groups and the government rise. Thus, the political equilibrium involves a positive subsidy. If, on the other hand, pollution is increasing in the subsidy the environmentalists are still better off if this is combined with a higher pollution tax, and cleaner production, than otherwise would emerge. However, the more distorting is the subsidy, the lower is the amount transferred in the political equilibrium