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Economics of Pollution Control. CH. 14 Part II. Market Allocation of Pollution. When firms create products, rarely does the process of converting raw material into outputs use 100 percent of the mass. Some of the mass, called a residual, is left over.

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Economics of Pollution Control

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Economics of pollution control

Economics of Pollution Control

  • CH. 14

  • Part II

Market allocation of pollution

Market Allocation of Pollution

  • When firms create products, rarely does the process of converting raw material into outputs use 100 percent of the mass.

  • Some of the mass, called a residual, is left over.

Economics of pollution control

  • 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.

Economics of pollution control

  • 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.

Economics of pollution control

  • It can also produce less output, so that smaller amounts of the residual are 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.

Economics of pollution control

  • When pollutants are injected into water or the air, they cause damages

  • These costs are not borne by the emitting source and hence not considered by it (are borne by society at large)

Economics of pollution control

  • The disposal of wastes into the air or water becomes inefficiently attractive.

  • The firm minimizes its costs when it this way

  • What is cheapest for the firm is not cheapest for society.

Economics of pollution control

  • In the case of stock pollutants: Uncontrolled markets would lead to an excessive production of the product that generates the pollution

  • Too few resources committed to pollution control, and an inefficiently large amount of the stock pollutant in the environment.

  • The burden on future generations would be inefficiently large.

Economics of pollution control

  • The inefficiencies associated with pollution control and the inefficiencies associated with the extraction or production of minerals, energy, and food exhibit some rather important differences.

Economics of pollution control

  • For private property resources, the market forces provide automatic signals of impending scarcity.

  • When private property and open-access resources (fisheries) sell in the same market, the private property owner tends to improve the excesses of those who utilize open-access properties.

Economics of pollution control

  • With pollution, no automatic improvement mechanism is evident.

  • Because this cost is borne partially by innocent victims rather than producers, it does not find its way into product prices.

Economics of pollution control

  • Firms that attempt unilaterally to control their pollution are placed at a competitive disadvantage; due to the added expense, their costs of production are higher than those of their competitors.

Economics of pollution control

  • Not only does the uncontrolled market fail to generate the efficient level of pollution control, but also it penalizes those firms that might attempt to control an efficient amount.

  • Hence, the case for some sort of government intervention is particularly strong for pollution control.

Efficient policy responses

Efficient Policy Responses

  • Efficiency is achieved when the marginal cost of control is equal to the marginal damage caused by the pollution.

Economics of pollution control

  • Each emitter should control its pollution until the MC of controlling the last unit is equal to the marginal damage it causes.

  • One way to achieve this outcome would be to impose a legal limit on the amount of pollution allowed by each emitter

Economics of pollution control

  • If the limit were chosen precisely at the level of emission where marginal control cost equaled the marginal damage, efficiency would have been achieved for that emitter.

Economics of pollution control

  • An alternative approach would be to internalize the marginal damage caused by each unit of emissions by means of a tax or charge on each unit of emissions (Read Example 14.1).

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