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Environmental Economics PowerPoint PPT Presentation


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Environmental Economics. Cost of Reducing Pollution. Total abatement Costs =Area A. $. MAC a. C a. A. P a. Greater Abatement. Pollution Reduction. Command and control. Legislate emission levels All firms required to reduce pollution to specific levels e f is maximum pollution

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Environmental Economics

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Environmental economics l.jpg

Environmental Economics


Slide10 l.jpg

Cost of Reducing Pollution

Total abatement

Costs =Area A

$

MACa

Ca

A

Pa

Greater

Abatement

Pollution Reduction


Command and control l.jpg

Command and control

  • Legislate emission levels

    • All firms required to reduce pollution to specific levels

  • ef is maximum pollution

  • Forced to cut in half (0.5ef)

  • What are costs of abatement?


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Firm 1

Firm 2

$

(High cost firm)

$

MAC2

C2

(Low cost firm)

MAC1

C1

(0,ef)

(ef,0)

.5ef

Total abatement for firm 2

Total abatement for firm 1

Abatement


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Firm 2

Firm 1

Total abatement

Costs = a+d+f+b+g

$

$

C2

d

Ce

f

C1

a

b

g

.5ef

Abatement


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Taxes

  • Instead of command and control, why not tax emission

  • Requires continuous monitoring

  • In this case, Ce is per unit tax

  • Two characteristics

    • Equal cost at the margin for both firms

    • Will show it holds total pollution constant to command and control levels


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Firm 2

Firm 1

Total abatement

Costs = a+d+f+b+g

$

$

C2

d

Ce

f

C1

a

b

g

.5ef

Abatement


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Firm 2

Firm 1

Total abatement

Costs = a+b+g

$

$

Total cost savings=d+f

C2

d

Ce

Ce

f

C1

a

b

g

.5ef

e1

Taxes paid,

Firm 2

Taxes paid,

Firm 1

Abatement


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Firm 2

Firm 1

$

$

C2

d

Ce

Ce

f

C1

a

b

g

.5ef

Abatement


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Firm 2

Firm 1

$

$

C2

d

Ce

Ce

f

C1

a

b

g

e1

.5ef

Abatement


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Cap and trade

  • Start with command and control levels

    • Receive permit to pollute 0.5ef

    • must abate 0.5ef

  • However, you can increase pollution levels only if you purchase the right to pollute from another manufacturer

  • Who would sell their right to pollute? Who would purchase?


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Firm 2

Firm 1

$

$

C2

d

Ce

Ce

f

C1

a

b

g

.5ef

e1

Abatement


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Firm 2

Firm 1

$

$

C2

d

Ce

Ce

f

C1

a

b

g

e1

.5ef

Abatement


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  • Firm 2

    • Willing to pay area d+f+b for the right to pollute more

  • Firm 1

    • Needs b to increase pollution

  • Trade will take place

  • Notice that both firms are better off

  • Costs of a abatement have fallen by d+f


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