Lecture note 4

Lecture note 4 POLLUTION CONTROL Property right approach (Coase theorem) Command and Control approach (CAC) Economic incentives approach (EI) To achieve the socially optimal level of pollution Property right approach Ronald Coase (1960) emphasizes the important of property right and bargaining between polluters and sufferers; rejects the intervention by the government. Regardless of who holds the property rights, there is an automatic tendency to approach the social optimal via bargaining. Illustration of the Coase theorem Cost Waste emissions Em (200) E(70) MEC E*(110) E (140) MAC 45 15 20 50 S Weakness and complications Polluters and sufferers are easily identifiable. In reality, pollution sources are multifaceted and impacts quite diffuse, many sufferers. The theorem does not address the impact of the property rights assignment has on income distribution It is assumed that shifting the property rights from one party to another would not cause either party to cease to function It assumes no transaction cost. In reality it is quite high Imperfect competition and bargaining power Command and Control approach(The precautionary principle) When scientific evidence is incomplete, it is prudent to act in advance of certainty Where persistent substances are being released into the environment Where human health damage effects are likely Where the high value environmental functions and services needed to be protected Command and Control approach(the case of standards) Consists of replying on standards of various types to bring about improvements in environmental quality The spirit is ‘ if you want people not to do something, simply pass a law that makes it illegal, then send out the authorities to enforce the law’. Violators are punished by monetary fine/imprisonment A standard is simply a a mandated level of performance that is enforced in law Marginal Abatement cost 10 20 5 10 15 50 200 Quantity of waste emitted Quantity of waste cleaned up MAC MAC Emission standards as a policy tool to control pollution Cost Waste emissions Em E MEC E* MAC S Compliance costs of meeting the standard Types of standards Three types: ambient, emission, technology Ambient standards refers to the qualitative dimensions of the surrounding environment (ambient quality of the air/city or water quality/river, lake) Ambient standards are normally expressed in terms of average concentration levels over some period of time. EX: sulfur dioxide (SO2)/annual mean; 24-hour average basic. Emission standards Emission standards An emission standard is a maximum rate of effluent discharge that is legally permitted Emission standards are normally expressed in terms of quantity of pollutants per some unit of time EX: grams/unit, tons per week/year Setting emission standards at a certain level does not necessary entail meeting a set of ambient standards. Emission standards Emission rates (e.g. kg per hour) Emission concentration (grams of Biochemical oxygen demand-BOD in waste water) Total quantity of residuals (rate of discharge times concentration times duration) Residuals produced per unit of output (SO2 emissions per kilowatt-hour of electricity produced) Residuals content per unit of input (sulfur content of coal used in power generation) Percentage removal of pollutant (e.g. 60 % removal of waste material before discharge) Technology, techniques/practices standards Technology standards dictates certain decisions and techniques to be used Standards application to retail chemical dealers Certification and training requirements Endangered species Act Farm worker protection The advantages of standards Less information is needed to introduce regulation. It is simple and direct to apply Effective in controlling harmful pollution morally appealing and politically popular Appeal to ‘rent-seeking’ behavior of exiting firms Aimed at achieving a predetermined policy target (environmental groups) The disadvantages of standards Highly interventionist (solely set by Gov.) Do not generate revenue A large bureaucracy to administer the program Potential to be used as barriers to entry Not cost-effective Less incentive to invest in new pollution control technology The cost-effectiveness of emission standards Cost Emissions firm 1 200 75 MAC2 100 MAC1 N Emissions firm 2 K M L 125 100 200 200 units reduced 100 for each firm Total abatement cost KLMN If firm 1 clean up 75 Firm 2: 125 Total abatement cost KLM MAC1 < MAC2 Incentive to invest in new pollution control technology Cost Waste Emission Wn MEC0 We MAC0 A B D MAC1 We: Max level allowed Total abatement cost A and B New technology MAC1 <MAC0 Total abatement cost: B Cost saving A New standard : Wn Total abatement cost B + D Cost saving : # A & D