EC 307: Resource & Environmental economics

Unit 3: Economics of Pollution Control

After studying this unit, you should be
able to:
• Discuss why it is important to determine appropriate
levels of waste and pollution.
• Explain two alternative point of views, (i)environment
capacity and (ii)economic efficiency, in determining
the appropriate levels of waste and pollution.
• Explain the difference between stock and fund
pollutants and the environmental goal for each
pollutants.
• Draw a graph to illustrate and explain how a fund
pollutant control model can be used to identify the
efficiency level of emission or the environmental goal.

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 Introduction
• The core of the relationship between the
environment and the economic system is goods
consumption and waste production.
– On one side there is a flow of goods, services and
energy from the environment to meet the human
needs.
– On the other side there is a flow of waste and
pollution from the economic system (humans) to the
environment.
– The flow of waste and pollution also have a feedback
effect on the flow of inputs from the environment to
the economic system.

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 Introduction
• From the waste feedback on the ability of the
environment to provide goods arises the need
to control the level of waste and pollution.

QUESTION:
• What is the appropriate flow of waste and
pollution to the environment?
– Addressing above answer involves trade-offs for
consumption decisions.

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 Introduction
• In order to address the question, we analyze 2
alternative points of view:
– Environmental capacity
– Economic efficiency

• In both cases we need a general framework

or model to understand the dynamic of the
relationship between the economic system
and the environment.

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 (i) Environmental capacity
• The appropriate level of pollution will depend on
the capacity of the environment to assimilate
such a level of pollution.
– For example, the ocean assimilates more waste than
a river or a lake
• The flow of waste and pollution in the
environment will confront the ability of the
environment to assimilate it.
• If this capacity is overpassed then waste will start
to accumulate.

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 Environmental goods

Assimilated, Negative feedback

absorbed, on flow of goods
transformed

Environmental goods
Pollution, Waste Environmental
damage

Stock of waste,
pollution

Environmental goods 7
 (i)Environmental capacity…
• Flow of waste:
– One part is assimilated by the environment
– One part is accumulated in the environment
– Before being accumulated or assimilated, one part
affects the environment’s:
• Natural balance
• Ability to produce more goods and services
• The flow of pollution will create a negative
feedback effect on the environment’s capacity
to provide goods and services.

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 (i)Environmental capacity…
• Absorptive capacity: ability of the environment to absorb
pollutants.
– If the emission load exceeds the absorptive capacity, then the
pollutant accumulates in the environment
• Stock pollutants: are pollutants for which the environment
has little or no absorptive capacity
– For example, non-biodegradable waste, like plastic bottles, heavy
metals
• Fund pollutants: are pollutants for which the environment
has some absorptive capacity
– ONLY accumulate when the absorptive capacity is lower that the
pollution flow.

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 (i)Environmental capacity…
• In practice, both STOCK and FUND pollutants may
accumulate in the environment.
• Pollutants by zone of influence:
• Horizontal: Analysis of local versus regional scale of
influence.
– Local pollutant will be experienced near the source of
pollution.
– Regional: effect will be experienced at long distances from
the source.
– Global pollutant: affect the entire planet.

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 (i)Environmental capacity…
• Vertical: whether the damage occurs at ground level
or at the upper-atmosphere
– Ground level: like particulate matter, lead
– Upper-atmosphere: like greenhouse gases
• Absorptive capacity: This depends on the nature of
the pollutant.
– Stock pollutant
– Fund pollutant
– In both above cases, if the absorptive capacity is
overpassed, the pollutant will accumulate.

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 (i)Environmental capacity…
• Stock pollutant: its impact persist in the long run and will
challenge the options of future generations. Even after stop
polluting the stock of pollutant will remain and also its impacts.
Stock of “stock pollutant”

Stop
polluting

time
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 (i)Environmental capacity…
• Fund pollutant: The environment could be able to
assimilate the pollutant if the load decrease or stop.
Stock of “fund pollutant”

Stop
polluting

time
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 (i)Environmental capacity…
• The impact on the environment: the load of pollution
may affect negatively the capacity of the environment to
supply goods and services (negative feedback).
• These impacts may be reversible or irreversible.
• The impacts may be on:
– Life (Living natural resources, included humans)
– Soil
– Water
– Air and also the climate (air at global scale)
– Exhaustible resources (mineral, petroleum)

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 (i)Environmental capacity…
• Some concepts (Perman et al., 2011) :
– Ecology: is the study of the distribution and abundance
of plants and animals.
– Ecosystem: an interacting set of plant and animal
populations, together with their abiotic (non-living)
environment.
– Stability: is the propensity of a population to return to
some kind of equilibrium following a disturbance.
– Resilience: is the propensity of an ecosystem to retain
its functional and organizational structure following a
disturbance.

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 (i)Environmental capacity…
• Some concepts (Perman et al., 2011) :
– Ecological footprints: (Humanity's ecological
footprint‘) the ecological impact of the human species.
– Biodiversity: the number, variety and variability of all
living organisms in terrestrial, marine and other aquatic
ecosystems and the ecological complexes of which they
are parts. Biodiversity is intended to capture two
dimensions:
• the number of biological organisms
• their variability.
• https://www.youtube.com/watch?v=KPn3lAJyG7A
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 Figure: Alternative responses of the environment to a disturbance

(1) Environment gets recovered and

reaches a higher steady state

disturbance
(2) Environment gets recovered and
Level of Environmental quality or abundance

reaches the original steady state

(3) Environment gets recovered and

reaches the lower steady state

(4) Environment did not recover and

reaches the lower steady state or get
extinct

Time

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 Figure: Stability of the environment to disturbances, e.g.,
pollution

disturbance
disturbance disturbance
Level of Environmental quality or abundance

Threshold of resilience

If the disturbance is over the threshold of

resilience, then the environment will be able to
get recovered

Time

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 (i)Environmental capacity…
• The negative impacts will affect the
environment’s capacity to provide:
• Exhaustible resources
– Minerals
– Petroleum- Energy
• Renewable resources
– Biological
• Fisheries
• Forests
– Energy?? (Solar E.)

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 (i)Environmental capacity…
• Goods and services from the environment
constitute sub-systems that must be analyzed
from a dynamic point of view.
• Dynamic refer to the inclusion of “time” as a
decision variable
• Thus, the decisions “today” may affect the
availability “tomorrow”.

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 (i)Environmental capacity…
• Resources may also be classified as stock and
flow resources
– Flow resources: no link between current use and
future availability.
– Stock resources: level of current use does affect
future availability.

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 (ii)Economic Efficiency
• Economic efficiency has to do with maximizing
the difference between the social benefit and
social cost of an economic activity, policy, or
project.
• Pollutants are the residuals of production and
consumption.
• In order to minimize the environmental damage
an efficient allocation of pollution must be
defined.
• This also must consider the dynamic nature of
the problem (time as a decision variable)
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 (ii)Economic Efficiency…
• Dynamic efficient allocation (Stock pollutants):
the one that maximizes the net present value.
• That is the present value of benefits received
from consumption X in year t minus the cost of
the damage caused in the environment (in t and
the cumulative damage over time).
– Note that environmental damage of stock pollutant
remain over time.
– Therefore stock pollutants create burdens for future
generations.
– Note the intergenerational equity problems.

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 (ii)Economic Efficiency…
• Static efficient allocation (Fund pollutants):
analyzed from the perspective of minimizing cost
(depending on the point of view is also a CBA).
• Assumption 1: The disturbance is inside the limits
of resilience of the environment.
– Thus, it may get recovered from the load of fund
pollutants.
– Opposite case, the disturbance goes beyond the
threshold of resilience then we analyze the situation
as a dynamic allocation problem.

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 (ii)Economic Efficiency…
• Assumption 2: The environmental damage is
reversible in the short run.
• Assumption 3: The level of marginal social cost of
pollution (MSC) increases exponentially (or in
quadratic way) with the level of pollution.
• Assumption 4: The level of marginal cost of
abatement (MCA) of pollution is also
exponentially increasing with the level of
abatement.
• The optimal social level of pollution is obtained
when the MSC of pollution equals MCA
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 (ii)Economic Efficiency…
• Certain level of pollution (E0) will result in
social damages that pollution creates by
degrading the:
– physical,
– natural, and
– social environment.
• We identify a Marginal Social cost of pollution
(MSC) and the area below as the total social
cost of pollution (are in red, i.e., the integral of
MSC)

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 Figure: Total cost of level of pollution E0
MC
Marginal Social
Cost of Pollution
(MSC)

Total Cost
of Pollution

E0
Emissions (E)

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 Figure 5.5 Component
Relationship of the MSC
(Kahn, 2005)

EC307 Resource and Environmental

Economics, Dr. Ricardo Gonzalez 28
 (ii)Economic Efficiency…
• The marginal damage function is useful for
thinking about the relationship between
environmental change and social welfare.
• The increasing slope of the marginal social
cost (MSC) indicates how damage changes
with each additional unit of pollution.
• An upward sloping marginal damage function
indicates that as the level of pollution
becomes larger, the damages associated with
the marginal unit of pollution become larger.

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 (ii)Economic Efficiency…
• One alternative could be zero pollution
• Zero pollution is not possible for two reasons:
– The reduction of pollution will have opportunity
costs.
– The Law of Mass Balance makes a choice of zero
physically impossible.
• The Law of Mass Balance states that the mass
of outputs of any activity are equal to the
mass of inputs.

EC307 Resource and Environmental Economics, Dr. Ricardo Gonzalez 30

 (ii)Economic Efficiency…
• Any consumption or production activity must
produce waste.
• the cost of reducing pollution includes the
opportunity costs of resources used to reduce
pollution and the value of foregone outputs.
• Abatement costs include:
– Labor
– Capital
– Energy needed to lessen emissions
– Opportunity costs from reducing levels of production
or consumption.

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 Figure: Pollution Control Model: Fund Pollutant
MC
Marginal Cost of
Marginal Social
Abatement (MCA)
Cost of Pollution
(MSC)

Total Cost of
Abatement

Emissions (E)

E=0 Pollution Abatement (A)

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 (ii)Economic Efficiency…
• The alternative: is to find an equilibrium between the
level of pollution that society can afford in order to
obtain a certain level of consumption.
• Confronting the cost of abatement and the social cost
of pollution in marginal terms, will result in an optimal
level of emissions (E*)
• E* results from Marginal analysis, which is useful
when a choice must be made about which level to
choose from a potentially infinite spectrum.
• Optimal level of pollution minimizes the total social
costs of pollution (the sum of total abatement costs
and total damages).

EC307 Resource and Environmental Economics, Dr. Ricardo Gonzalez 33

 Figure: Pollution Control Model: Fund Pollutant
MC
Marginal Cost of Marginal Social
Abatement (MCA) Cost of Pollution
(MSC)

MCA = MSC
Total Cost
of Pollution Total Cost of
MC* Abatement

Pollution Abatement (A) E* Emissions (E)

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 (ii)Economic Efficiency…
• As better we could know the MSC and MCA,
better will understand the E*.

• In real life, knowing the level of pollution E* is

too difficult.

• The central planner (or policy maker) see the

efficient or optimal level of pollution as the
environmental goal to reach.

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 (ii)Economic Efficiency…
• A greater or lower level of pollution would
result in an inefficient level of emissions.

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Figure: Social Cost of pollution when pollution level
MC
is greater than optimal
Marginal Cost of Marginal Social
Abatement (MCA) Cost of Pollution
(MSC)

MCA < MSC

MCA = MSC
Total Cost
of Pollution Total Cost of
MC* Abatement

Pollution Abatement (A) E* Emissions (E)

37
Figure: Social Cost of pollution when pollution level
MC
is lower than optimal
Marginal Cost of Marginal Social
Abatement (MCA) Cost of Pollution
(MSC)

MCA > MSC

MCA = MSC
Total Cost
of Pollution Total Cost of
MC* Abatement

Pollution Abatement (A) E* Emissions (E)

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 (ii)Economic Efficiency…
• Social Costs of Pollution are negative
externalities.
• Abatement cost are assumed by the firm (not
externalities).
• Firms that attempt to control pollution are
placed at a competitive disadvantage.

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 (ii)Economic Efficiency…
• The market fails to generate the efficient level
of pollution control and penalizes firms that
attempt to control pollution.
• The environmental authority will use this
optimal level of pollution as the goal to
reach.
• Therefore, all the environmental policies will
be dealt by E*

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 Figure: Pollution Control Model: Fund Pollutant
MC
Marginal Cost of Marginal Social
Abatement (MCA) Cost of Pollution
(MSC)

MCA = MSC
Total Cost
of Pollution Total Cost of
MC* Abatement

Pollution Abatement (A) E* Emissions (E)

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