Lecture note 5
Pigouvian tax based on output easily to implement and monitor How output and waste are related? Assume that technical relationship between output and waste conversion is relatively stable Polluter- pays principle: not shifting the tax burden onto other members of the society Provide no incentive to firms to search for improved method of waste disposal (due to based on output) Need to know the optimal output prior to imposing the tax
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Lecture note 5 POLLUTION CONTROL Economic Instruments To achieve the socially optimal level of pollution Types of EIs Emission (effluent) charges or taxes User charges Product charges Administrative charges or fees Tradable permits Deposit-refund system Subsidy Advantages of economic instruments Automatic adjustment: polluters lower their emissions Cost-effectiveness Incentive for ‘environmentally friendly’ behavior Flexibility: for both Gov. and polluters Revenue raising Resource conservation and transmission Price/cost Quantity Output MEC MNPB T* Q* Optimal pollution tax How a Pigouvian tax would work Pigouvian tax based on output easily to implement and monitor How output and waste are related? Assume that technical relationship between output and waste conversion is relatively stable Polluter- pays principle: not shifting the tax burden onto other members of the society Provide no incentive to firms to search for improved method of waste disposal (due to based on output) Need to know the optimal output prior to imposing the tax EI: Effluent charge Effluent charge is a tax (or financial penalty) imposed on pollution The charge is based on per unit of effluent emitted to the environment Pollution control through effluent charge Cost Waste emission 400 100 Own cost of control: C A tax on untreated units: A+ B Firm total cost: A + B + C 150 Tk MAC =Tk B E F C D A 30 The optimal effluent charge Cost Waste emissions Em Tk MEC Wo MAC S Incentive to improve waste control technology Cost Emission 400 Wk =1000 MAC1 H MAC0 :0riginal AB cost: G + H TAX: D + E + F Total : DEFGH MAC1: New Total D + E + H Cost saving: F + G MAC0 F D E G Tk Wm =1500 Charge/cost Pollution reduction MAC1 MNPB Tk S2 Standard and charge MAC2 MAC3 S3 S1 A X B Y C TACST = OAS2 + OBS2 + OCS2 TACTAX = OXS1 + OBS2 + OYS3 TACST – TACTAX = S1XAS2 – S2CYS3 Price/cost Quantity Output S0 D P0 Q0 Who pay for tax: detergent; D elastic S1 Q1 P0 + T0 P0 - T0 P1 Price/cost Quantity Output S0 D P0 Q0 Who pay for tax: Fuel, diesel; D inelastic S1 Q1 P0 + T0 P0 - T0 P1
