Chapter 5: Economics of Pollution

1. Chapter 5:Economics of Pollution

2. Forms of Pollution • Air pollution • Water pollution • Land contamination • Noise pollution

3. Sources of Pollution • Use of Natural Resources • Production of Goods & Services • Consumption of Goods & Services

4. Sources of Air Pollution • Carbon monoxide • Sulfur dioxides • Nitrogen oxides • Hydrocarbons • Particulates

5. Reasons for Pollution • No one has or enforces private property rights over the environment being polluted • The collectively consumed nature of the environment being polluted

6. Costs of Pollution • Environmental decay • Loss of income • Medical expenses • Loss to society • Opportunity costs of pollution control expenditures

7. Economic of Pollution • Demand • Marginal Social Benefit, MSB • Marginal Private Benefit, MPB • Supply • Marginal Social Cost, MSC • Marginal Private Cost, MPC

8. Effects on the Polluter MSC>MPC: Paper is under-priced, but over-produced Price D MSC B S = MPC 13 C 11 Dead-Weight Loss=ABC 9 A D Reams per day r0 r1

9. Effects on the User: MPC>MSC: electricity is under-supplied, but over-priced Price D S = MPC MSC C 0.12 A 0.10 Dead-Weight Loss=ABC 0.08 B D e0 e1 Kilowatt-hours per day

10. Policies of Pollution Control • Moral suasion • Education • Recycling • Market solution • Law-suites • Pollution rights • Government solution • Taxes • Subsidies • Regulations

11. Economics of Pollution Control • The optimal amount of pollution control is achieved where its MSB = MSC • If taxation is used to control pollution, the optimal level of tax must be set to make MSB = MSC

12. Pollution Tax Dollar per unit MSC MSC>MSB T1 MSB=MSC T* B T2 MSB>MSC MSB C* Pollution control