Unit Five:

Economics of pollution Control and Environmental Policy

5.1. Pollution Taxonomy
• The amount of waste products emitted determines the load upon the
environment.
• The damage done by this loads depends on the capacity of the
environment to assimilate the waste products.
• We call this ability of the environment to absorb pollutants its absorptive
capacity. If the emission loaded exceeds the absorptive capacity the
pollutant accumulates in the environment.
• Pollution for which the environment has little or no absorptive capacity
are called stock pollutants. Stock pollutants accumulate over time as
emission enter the environment.
• Example of stock pollutants include non-biodegradable bottles tossed by
the road side, heavy metal, such as lead, which accumulate in the soils
near the emission source; and persistent synthetic chemical.
 Cont..
• Pollutants for which the environment has some absorptive
capacity are called fund pollutants. For these pollutants, as
long as the emission rate does not exceed the absorptive
capacity of the environment, the pollutant does not
accumulate.
• The point is not that the mass is destroyed, rather, when
fund pollutants are injected into the air or water, they may
be transformed in to substances that are not considered
harmful to people or to the ecological system or they may
be diluted or dispersed that the resulting concentration are
not harmful.
Cont….
• Pollutants can also be classified by their zone of influence, defined both
horizontally and vertically.
• The horizontal dimension deals with the domain which damage from an emitted
pollutant is experienced. The damage caused by local pollutants is experienced
near the source of emission. While the damage from regional pollutants is
experienced at great distance from the source of emission. The local and regional
categories are not mutually exclusive, it is possible for a pollutant to be both.
• The vertical zone of influence describes whether the damage is caused mainly
• by ground level concentration of an air pollutant or
• by concentration in the upper atmosphere.
• When the damage caused by a pollutant is determined mainly by concentrations
of the pollutant near the earth surface, it is called a surface pollutant. When its
damage is rated more to its concentration in the upper atmosphere, the
substance is called global pollutant. Water pollutants can be categorized as
surface pollutant, but air pollutants can be surface pollutant or global pollutants.
• This taxonomy will prove useful in designing policy response to these various
types of pollution problems. Each type of pollutants requires a unique policy
response. The failure to recognize the distinction in policy making leads to
counterproductive policy.
5.2. Defining the Efficient Allocation of Pollution
• The presence of pollutants in the environment may depreciate the service
provided by the environment. An efficient allocation resource must take
this costs in to account. What is meant by the efficient allocation of
pollution depend on the nature of the pollution.
1. Stock Pollutants
• The efficient allocation of stock pollutant must take into account the fact
• that the pollutant accumulated in the environment and
• that the damage caused by its presence increases and persists as the pollutant
accumulates.
• By their very nature, stock pollutants create interdependency between the
present and the future, since the damage imposed in the future depends on
the current action.
• Suppose we take an allocation of commodity X and the production of X
involves the generation of a proportional amount of stock pollutants. The
amount of these stock pollutants can be reduced, but that takes the
reduction of production of X. The damage caused by the presence of this
pollutant in the environment is further assumed to be proportional to the
size of the accumulated stock. As long as the stock of pollutants remains in
the environment the damage persists.
Cont…
• The efficient allocation by definition is the one which maximizes the
present value of the net benefit.
• In this case the net benefit at any point in time T is equal to the benefit
received from the consumption of X minus the cost of damage caused by
the presence of the stock pollutant in the environment. This damage is a
cost that society must bear, and in terms of its effect on the efficient
allocation.
• This cost is like that of extraction cost for minerals and fuels. While for
minerals the extraction cost rises with the accumulative amount of the
Depletable resources extracted, the damage cost associated with stock
pollutants rises with the cumulative amount deposited in the environment.
The accretion of the stock pollutant is proportional to the product of X
and this pollution cost as exists between the extraction cost and the
production of minerals. They both, rise over time with the accumulative
amount produced, the one major difference is that the extraction cost is
born only at the time of extraction while the damage is borne as long
as the stock pollutant exist in the environment.
 Cont…
• We can exploit this similarities to infer the efficient allocation of a stock
pollutant from our knowledge of efficient allocation of Depletable
resource with rise in the extraction cost. When the extraction rises, the
efficient quantity of Depletable resource extracted and consumed declines
over time.
• The efficient quantity of X(and therefore), the addition to the accumulation
of this pollutant in the environment) would decline overtime as the
marginal cost of damage rises. The price of X would rise over time
reflecting the rising social cost of production. To cope with the increasing
marginal damage, the amount of resource committed to controlling the
pollutant would increase over time..
• Technological progress could modify this efficient allocation, specifically,
technological progress could reduce the amount of pollutant generated per
unit of X produced,
• it could create ways to recycle the stock pollutant rather than injecting in
to the environment, it could develop ways to rendering the pollutant less
harmful. All this responses would lower the marginal damage cost
associated with a given level of production of X. Therefore, more of X
could be produced with technological progress than without it.
 Cont…
2. Fund Pollutant
• the emission of fund pollutants exceeds the assimilative capacity of the
environment, they accumulate and share some of the characteristics of
stock pollutants.
• When the emission rate is low enough,
• the discharged can be assimilated by the environment, with the result
that the link between present emission and future damage may be
broken.
• When this happens current emission cause current damage and future
emission cause future damage, but the level of future damage is
independent of current emissions.
• This independence of allocation among time period allow us to explore
the efficient allocation of fund pollutant using the concept of static rather
than dynamic efficiency.
• Generally, the marginal damage caused by a unit of pollution increases
with the amount emitted.
 Cont….
• When small amount are emitted the marginal damage cost will be
smaller, however when large amount are emitted, the additional
increment can cause significantly more damage.
• Small amount of pollution are easily diluted in the environment; the
body(environment) can tolerate small quantities of substance,
however as the amount in the atmosphere increase, dilution is less
effective and the body is less tolerant.
• Marginal control cost commonly increase with the amount control.
The larger the level of pollutant we want to reduce(control) the
higher the marginal control cost.
Market Allocation of Pollution
• Since air and water are treated in our legal system as common property
resources, and the market misallocate them, our general conclusion that
common property resources are over exploited certainly applies here, air
and water resources have been over exploited as waste respiratory.
• When firms create products, rarely dose the process of converting the raw
material in to output use 100% of the mass, some of the mass called a
residual, is left over. 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.
• 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.
• It can also produce less output so that the smaller amount of residuals is 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.
• Because damage costs are externalities but control are not, what is
cheapest for the firm is not always cheapest for society as a whole.
 Cont…
• When pollutants are injected in to water course or atmosphere, they
cause damages to hose firms and consumers downstream and
downwind of the sources.
• These costs are not borne by the emitting/rease sources and hence
not considered by it, although they certainly are born by society at
large.
• As with other services which are systematically undervalued, the
disposal of wastes into water or air becomes inefficiently attractive.
Inefficient pollution control choice lead to further inefficiency in
product and input market.
 Cont…
• In the case of stock pollutants, the problem is particularly severed.
Uncontrolled markets would lead to an excessive production of X,
too few resources committed to pollution control, and an inefficiently
large amount of the stock pollutant in the environment, thus the
burden on future generation coursed by the presence of this pollutant
would be inefficiently large.
• Firms which attempt unilaterally to control their pollution are placed
at a competitive disadvantage; due to the added expenses, their cost
of production is higher than those of their less conscientious
competitors.
• Not only does the unimpeded market fail to generate the efficient
level of pollution control, it penalize those firms which might attempt
to control an efficient amount.
• Hence, the case for some sort of government intervention is
particularly strong for pollution control.
 Efficiency Policy Response
• Efficiency is achieved when the marginal control cost is equal to the
marginal damage coursed by the pollution for each emitter.
• One way to achieve this equilibrium would be to impose legal control
(limit) on the amount of pollution allowed by each emitter. If the limits
were choose precisely at the level of pollution where the marginal control
cost equal the marginal damage (Q* from figure 5.1) efficiency would have
been achieved.
• An alternative approach would be to internalize the marginal damage
coursed by each unit of emission by means of tax or charge on each unit of
emission.
• Either the per unit charge could increase with the level of pollution
(following the marginal damage curve for each succeeding unit of emission)
or the tax rate could be constant as long as the rate were equal to the
marginal social damage at the point where the marginal social damage and
marginal control cost cross (see figure 5.1).
• Since the emitter is paying the marginal social damage, when confronted by
these fee, pollution cost would be internalized. The efficient choice would
also be the cost minimizing choice for emitter.
 Cont…
• However, while the efficient level of these policy instruments can easily be
redefined in principle they are very difficult to implement in practice.
• To implement either of these policy instruments, we must know the level
of pollution at which the two marginal cost curves cross for every emitter.
This impose unrealistically high information burden on control authority.
Control authority typically has very poor information on control costs and
little reliable information on marginal damage function.
• How can environmental authorities allocate pollution control responsibility
in a reasonable manner when the information burden is apparently so
unrealistically large?
• One approach used by several countries is to select specific legal level of
pollution based on some other criteria, such as providing adequate margins
of safety for human or ecological health. Once these thresholds have been
established by whatever means, only half of the problems have been
resolved, the other half deals with deciding how to allocate the
responsibility for meeting predetermined pollution level among the large
number of emitters.
 Cont…
• This is precisely where the cost effective criteria comes in.
• Once the objective is stated in terms of meeting the predetermined
pollution level at minimum cost; it is possible to derive the condition
that any cost effective allocation must satisfy. These conditions can
then be used as a basis for choosing among various kinds of policy
instruments which impose more reasonable information burden on
control authority.
Cost-Effective Policy for Uniformly Mixed Fund Pollutants
A Cost -Effective Allocation
• The damage coursed by uniformly mixed fund pollutants depend on
the amount entering the atmosphere.
• The damage coursed by this pollutants are relatively insensitive to
where the emission are injected into the atmosphere, thus the policy
simply can focus on controlling the total weight of emission in a
manner that minimizes the cost of control.
• How can we achieve cost effective allocation of uniformly mixed fund
pollutants?
• Consider a simple example. Assume there are two emission sources
currently emitting a total of 30 units of emission, assume further that
the control authority determine that the environment can assimilate
15 units, so that a reduction of 15 units is necessary.
• How should this 15 unit reduction be allocated between the two
source in order to minimize the total cost of the reduction.
 Cont…
• With the aid of figure 5.2 below we can demonstrate the answer. The figure is
drawn by measuring the marginal cost of control for the first source from the left
hand axis (MC1) and the marginal control cost for the second source from right
hand axis(MC2).The total of 15 unit reduction is achieved for every point in this
graph.
• Each point represent some different combination of reduction by the two source.
Drawn in this manner the diagram represent all possible allocation of 15 units
reduction between the two sources.
• The left hand axis represent the allocation of the entire reduction to the second
source, while the right hand axis represent a situation in which the first source
bear the entire responsibilities.
• All points between represent different degrees of shared responsibilities.
• What allocation minimizes the cost of control?
• In the cost effective allocation the first source cleans up 10 units and the second
unit cleans up 5 units. Any other allocation would result in a higher total control
cost.
• The cost of achieving a given reduction in emission will be minimized if and only if
the marginal costs of control are equalized for all emitters. This is demonstrated
by the fact that the marginal cost curves cross at the cost effective allocation.
 Cost Effective Pollution Control Policies
• The cheapest method of control will differ widely among industries
and also among plants in the same industries.
• The selection of the cheapest method require detailed information on
the possible control techniques and their associated costs.
• Generally, plant managers are able to acquire this information for
their plant, when it is in their interest to do so.
• However, the government authorities responsible for meeting
pollution target are not likely to have his information.
• Since the degree to which these plants would be regulated depends
on cost information, it is unrealistic to expect these plant managers to
transfer unbiased information for the government.
• Plant managers would have a strong incentive to overstate control
costs in hopes of reducing their ultimate burden.
 Cont…
a) Emission Standard
• is a legal limit on the amount of pollutant an individual source is allowed to
emit.
• In our example, it is clear that the two standard should add up to the
allowable 15 units, but it is not clear how, in the absence of information in
control cost, these 15 units are to be allocated between the two sources.
• The easiest method of resolving this dilemma and the one chosen in the
earliest days of pollution control would be simply to allocate each source
an equal reduction. As is clear from figure 6.2 it is not a cost effective, while
the first source would have lower costs, this cost reduction would be
substantially smaller than the increase faced by the second sources
• . Compared to the cost-effective allocation, total costs would increase if
both sources were forced to clean up the same amount. When emission
standards are used, there is no reason to believe that the authority will
assign the responsibility for emission reduction in a cost-minimizing way.
 Cont..…
b) Emission Charge
• is a fee collected by the government, levied on each unit of pollutant emitted into
the air or water.
• The total payment of any source would make to the government could be found
by multiplying the fee times the amount of pollution emitted.
• Emission charges reduce pollution because pollution costs firms money.
• To save money, the source seeks way to reduce its pollution.
• How much pollution control would the firm choose to purchase?
• A profit maximizing firm would control, rather than emit, pollution whenever it is
proved cheaper to do so.
• We can illustrate the firms decision with figure 5.3. the level of uncontrolled
emission is 15 units and the emission charge is T, thus if the firm were to decide
against controlling any emission, it would have to pay T times 15 representing the
area OTBC.
• Is this the best the firm can do? obviously not, since it can control some pollution
at a lowest cost than paying the emission charge, the firm would minimize its cost
by choosing to cleanup 10 units of pollution and emitting 5 units. At this allocation
the firm would pay control cost equal to the area OAD and total emission charge
payment equal to area ABCD for a total cost of OABC. This is clearly less than
OTBC, the amount firm would pay if it choose not to cleanup any pollution.
 Cont…
• How high should the charge be set to ensure that the resulting emission reduction is the
desired level of emission reduction?
• Without knowing the cost of control, the control authority cannot establish the correct
tax rate on the first try. It is possible however to develop an iterative, trial and error
process to find the appropriate charge rate. This process is incited by choosing an
arbitrary charge rate and observing the amount of reduction that occurs when that
charge is imposed.
• If the observed reduction is larger than desired it means the charge should be lowered
and if the reduction is smaller, the charge should be raised.
• This process can be repeated until the actual and the desired reduction are equal. At that
point the correct emission charge would be found.
• The charge system not only causes sources to choose a cost-effective allocation of the
control responsibility, it also stimulates the development of newer, cheaper means of
controlling emission, as well as promoting technological progress.
• With an emission charge the minimum cost allocation of meeting a predetermined
emission reduction can be found by a control authority even when it has no information
on control [Link] emission charge also stimulates advancement in emission reduction.
• During the trial and error period of finding the appropriate rate sources would be faced
with a volatile emission charge.
• Changing emission charge would make planning for the future difficult. Investments that
would make sense under a high or low emission charge might not make sense when it
falls or rises.
 Cont…
C) Transferable Emission Permits
• Under this system all sources are required to have permitted to emit. Each permit
specifies exactly how much the firm is allowed to emit.
• The permits are freely transferable; they can be bought and sold.
• The control authority issues exactly the number of permits needed to produce the
desired emission level.
• Any emission by the source in excess of those allowed by its permit would cause the
source to face several monetary sanctions.
• Why this system automatically leads to a cost-effective allocation can be seen in the
following figure.
• Suppose the first source found itself with 7 permits, since it has 15 units of uncontrolled
emission this would mean it must control 8 units.
• Similarly, suppose that the second source has the remaining 8 permits, and would have to
clean up 7units.
• In this case both firms have an incentive to trade. The marginal control cost for the
second source (C) is substantially higher than that for the first (A), the second source
could lower its cost if it could buy a permit from the first source at a price lower than
C.
• The first meanwhile would be better off if it could sell a permit for a price higher than A.
since C is greater than A, grounds for trade certainly exist.
 Trans-boundary Environmental Problem and Policy Issues

• There are also international problems that require the

concern of few or all countries in the world.
• These are global warming, depletion of ozone layer, loss of
global biodiversity, international water, acidic rain,..etc.
• In such kind of problem the kind of policy a country follow is
not the same as we have discussed, because there is a
question of efficiency that will be created due to the
discrepancy of marginal net benefit of pollution reduction
nationally and globally.