Outline:

1. The economics of pollution and pollution control

i. Pollution as a negative externality

ii. Pollution control in theory

iii. Pollution control in practice

2. Pollution controls

i. Direct controls

ii. Emissions taxes

iii. Tradeable emissions permits

3. Dollars and Sense Articles 36, 38.

4. New Field Guide: 8.1, 8.3, 8.5, 8.6, 8.9, 8.12, 8.16

1. The economics of pollution and pollution control:

i. Pollution is a negative externality.

* Pollution arises from the behavior of firms and consumers.

* The technology of production and consumption automatically generates pollution.

* Economic rationale for controlling pollution:

There are external costs that are not being taken into account by private parties to a transaction which are being imposed on other members of society.

GRAPH

MSC = MC + EC

EC = the external cost or marginal cost of production imposed upon others.

Definition:

Internalizing an externality is making the firm face the entire social cost of its production which leads it to the socially optimal outcome (Qs)

ii. Pollution Control in theory:

* There is an optimal level of pollution control that can be determined by comparing the benefits and costs of pollution control

GRAPH

* Estimate Marginal Benefit (MB) of pollution control (abatement)

* Estimate the Marginal Cost (MC) of pollution control (abatement)

* where MB=MC you have the optimal level of pollution control

Summary of the economic argument:

1. Unregulated markets will produce excessive amounts of environmental degradation.

2. It is not technologically possible nor economically efficient to eliminate all pollution.

iii. Pollution control in Practice:

1. Difficult to measure MB, MC

2. Requires some organization like the EPA to develop and enforce regulations

3. There are technological and legal impediments to achieving optimal pollution control

3. Pollution Controls used by the government:

i. Direct controls:

* Standards that are imposed across the board.

Eg. Automobile emissions standards

* Most common form of pollution control

* Often require special techniques for controlling pollution

Eg. "Scrubbers" in coal fired utility plants

* Often involves banning certain behaviors

Eg. wood burning bans in Denver

Disadvantages -

* doesn't allow firms to decide how to abate pollution

* not efficient in terms of accounting for different costs of pollution abatement

* monitoring and enforcement costs are high

Advantages -

* some problems can only be solved with direct controls

* sometimes banning a behavior is most desirable

ii. Emissions taxes:

*Tax on emissions at their source - impose a tax t per unit of emissions

* The more a firm/consumer pollutes, the more they pay in taxes.

Advantages -

* can internalize the externality by choosing the right tax rate

* efficient in terms of recognizing different costs of pollution abatement and allowing firms to decide how much to abate

* firms can choose their own method of abatement

Disadvantages -

* requires a lot of information to set the tax rate correctly

* need to be able to accurately measure emissions

iii. Trade-able emissions permits:

* Firms/consumers can buy and sell rights to pollute (market in pollution rights)

* A certain number of permits are auctioned off to the highest bidders for a given total amount of allowable pollution.

* environmental groups can buy up permits and destroy them thereby reducing the overall amount of pollution,

Advantages -

* high cost polluters can buy the right to pollute from low cost polluters

* efficient in terms of recognizing the differences in costs of pollution abatement

* amount of pollution is set by the number of permits supplied

* requires less information than emissions taxes

Disadvantages -

* difficulty measuring pollution and defining the optimal amount to allow

* distributional consequences of a market in pollution rights - areas with the high cost polluters will have lots of pollution

Question: Think of this on a global scale - what would the world be like if there were international markets in pollution rights?