Lecture 5 THE ECONOMICS OF POLLUTION CONTROL

 Pollution is a side effect of production.

 Pollution is defined as the introduction of waste and harmful

products in to an environment that is classed as undesirable.

 The economics of pollution control deals with; how severe should

environmental standards be for: air quality, surface water quality,
drinking water quality and any other pollutant.

 In this unit we back to the flow of wastes in to the system

focusing on:

1. What is the appropriate level of waste flows?

2. How
6/5/2024
to allocate the flows? SET BY M.A 1
 Pollution Taxonomy
 Pollution is the introduction of contaminants into
a natural environment that causes instability, disorder, harm or
discomfort to the ecosystem
 i.e. physical systems or living organisms.

 Pollution can take the form of chemical substances or energy, such as

noise, heat, or light.

• Pollutants, the elements of pollution, can be foreign substances or

energies, or naturally occurring; when naturally occurring, they are
considered contaminants when they exceed natural levels.

6/5/2024 SET BY M.A 2

 Con’t….
• The damage caused by waste disposal depends crucially upon the
environment's ability to absorb the waste.

• The absorptive capacity refers to the environment's ability to absorb

waste products.

Examples of absorptive capacity:

Carbon dioxide is absorbed by plant life

Organic pollution in waterways can be transformed into less-harmful

inorganic matter by bacteria in the waterways.

6/5/2024 SET BY M.A 3

 Con’t….

Absorption
capacity of the
environment

Emission load Pollution Pollution

accumulations damage

 If emissions exceed the absorptive capacity of the system,

they will accumulate in the environment and cause damage.

6/5/2024 SET BY M.A 4

 Con’t….
• Pollution may be defined as the presence/release of certain substances
(harmful environmental contaminants) beyond the absorptive capacity
of the earth.

• Most of the substances that cause pollution are naturally present in the
environment in low concentration, and are usually considered to be
harmless.

• Thus a particular substance is considered as pollution only when its

concentration is relatively high and cause adverse effects.

6/5/2024 SET BY M.A 5

 5.2. Modeling pollution mechanisms
 The extent to which these waste loads generate impacts that are
associated with subsequent damage depends upon several things,
including:

The assimilative (or absorptive) capacity of the receptor environmental

media;

The existing loads on the receptor environmental media;

The location of the environmental receptor media, and

The number of people living there and the characteristics of the

affected ecosystems;

Tastes and preferences of affected people.

6/5/2024 SET BY M.A 6
 con’’t..

6/5/2024 SET BY M.A 7

 Pollution flows, pollution stocks and pollution damage
• Pollution can be classified in terms of its damage mechanism.

• Flow-damage pollution and stock-damage pollution.

• Flow-damage pollution occurs when damage results only from the flow of residuals:
that is, the rate at which they are being discharged into the environmental system.

• By definition, for pure cases of flow-damage pollution, the damage will

instantaneously drop to zero if the emissions flow becomes zero.

• This can only be exactly true when the pollutant exists in an energy form such as
noise or light so that when the energy emission is terminated no residuals remain in
existence.

• However, this characterization of damages may be approximately true in a wider

variety of cases, particularly when the residuals have very short life spans before
being transformed into benign forms.
6/5/2024 SET BY M.A 8
 con’’t….
• Stock-damage pollution describes the case in which damages depend
only on the stock of the pollutant in the relevant environmental system
at any point in time.

• For a stock of the pollutant to accumulate, it is necessary that the

residuals have a positive lifespan and that emissions are being
produced at a rate which exceeds the assimilative capacity of the
environment.

• An extreme case is that in which the assimilative capacity is zero, as

seems to be approximately the case for some synthetic chemicals and a
number of heavy metals.
6/5/2024 SET BY M.A 9
 con’’t..
• Metals such as mercury or lead accumulate in soils, aquifers and
biological stocks, and subsequently in the human body, causing major
damage to human health.

• Using M to denote the pollution flow, A to denote the pollution stock

and D to denote pollution damage, we therefore have two variants of
damage function:

 Flow-damage pollution: D =D(M)

 Stock-damage pollution: D =D(A)

6/5/2024 SET BY M.A 10

 Sources of pollution
• It can be categorized as point or non-point sources.

• Point sources are identifiable points or places that you can easily
locate.

• Point sources are localized identifiable sources of contaminants, such

as

 power plants,

refineries, mines, factories,

 wastewater treatment plants, etc.

6/5/2024 SET BY M.A 11

 Con’t…
• Nonpoint sources are those that are distributed over a wide geographic
area, such as a watershed.

• A non-point source (also known as ‘diffuse pollution’) is one where it

is difficult to identify the exact origin of the pollution.

• Nonpoint sources can also include mobile sources such as cars, buses,
and trains.

• Although each of these is a point source, they are moving and thus
spread their cumulative impact over a large geographic area.

• A typical nonpoint source of pollution would be urban runoff, where

the contaminant load may be the sum of thousands of small point
sources
6/5/2024
within the watershed. SET BY M.A 12
 Types of pollutant

 A pollutant is a waste material that pollutes air, water or soil.

 Three factors determine the severity of a pollutant:
 Its chemical nature,
 The concentration and
 The persistence.

6/5/2024 SET BY M.A 13

 Classification of Pollutants by Absorptive Capacity

 Depending on the capacity of the environment to

absorb waste pollutants can be classified in to two as:

• a. Stock pollutant is a pollutant for which the environment

has little or no absorptive capacity.

• E.g.
 Non biodegradable bottles, Heavy metals (e.g., lead)
 Some synthetic chemicals (dioxins and ( Polychlorinated
biphenyls) PCB’s).

6/5/2024 SET BY M.A 14

 Con’t….
b. Fund pollutant is a pollutant for which the environment has some
absorptive capacity.

Examples: Carbon dioxide, Waste paper products

 There are two types of fund pollutants.

i. Uniformly mixed fund pollutant: - is one whose damage depends

upon the total amount of the pollutant entering the system.

ii. Non-uniformly mixed fund pollutant: - is one whose damage is

relatively sensitive to where emissions are injected into the system.

6/5/2024 SET BY M.A 15

Classification of Pollutants by Horizontal Zone of Influence
 Depending on the horizontal zone of influence pollutants
can be classified as:

a) Local pollutant: The damage caused by a local pollutant is

experienced near the source of the emissions. E.g.
• Non biodegradable plastics

b) Regional pollutant: The damage caused by a regional pollutant is

experienced at greater distances from the source.

 Sulfur dioxides from coal emissions are believed to be a reason in the acid
rain problem.
 Carbon dioxide
 Note: It is possible for a pollutant to be both. E.g. CO2 ,sulfur oxide and
nitrogen oxide
6/5/2024 SET BY M.A 16
 Classification of Pollutants by Vertical zone of influence
A. Surface pollutant: is one whose damage is determined
mainly by the concentration of the pollutant near the earth's
surface.

Examples: water pollutants and plastics

B. Global pollutant: refers to a pollutant whose damage is determined by

its concentration in the upper atmosphere.

Examples:

• Carbon dioxide is often cited as a contributor to the greenhouse

effect.

• Chlorofluorocarbon
6/5/2024 emissions are
SET BYlinked
M.A to ozone depletion 17
 The Efficient Allocation of Pollution
• Question: What is the appropriate level of pollution?

• Recall that the optimal level of pollution is not zero.

• We need to consider the marginal costs and marginal benefits of

pollution.

• The efficient level pollution abatement (or the optimal level of

pollution control) occurs where the marginal abatement cost (MAC) is
equal to the marginal damage cost (MDC).
• MAC = MDC

6/5/2024 SET BY M.A 18

 Con’t..
• The marginal abatement cost (MAC) is the cost of abatement or
controlling an extra unit of pollution.

• It is also known as the marginal control cost

• Note that there is a negative relationship between MAC and the

quantity of pollution.

• The higher the MAC, the lower the quantity of pollution; and vice
versa.

6/5/2024 SET BY M.A 19

 Con’t…

6/5/2024 SET BY M.A 20

 Con’t…
• The marginal damage cost (MDC) is the health or environmental damage
caused by an extra unit of pollution it is also known as the marginal pollution
cost.

• Again note that there is a positive relationship between MDC and the quantity
of pollution.

• The higher the quantity of pollution, the higher the MDC, and vice versa.

• Graphically, the MDC doesn’t start at zero.

• But at positive amount of pollution because of the ability of the environment

to assimilate certain amount of pollution without any damage.

6/5/2024 SET BY M.A 21

 Con’t…

6/5/2024 SET BY M.A 22

 Con’t…
• Graphically, efficient pollution abetment occurs at the intersection of the MAC and
the MDC curves, such as at point Q* in the graph below.

• At points below Q* such amount spent on controlling pollution (MAC) is greater than
the damage due to pollution (MDC).

• Therefore , the incentive is to reduce the amount spent on controlling pollution,

MAC, thereby raise the quantity of pollution and move towards Q*.

• On the other hands, at points above Q*, the damage caused by pollution (MDC) is
greater than the amount spent on controlling pollution (MAC).

• Therefore, the incentive is to reduce the damage, MDC, by reducing the quantity of
pollution, and move towards Q*.

6/5/2024 SET BY M.A 23

 Con’t….
• Equilibrium will, therefore, occur at Q*, where MAC = MDC, because
that is where the market forces of MAC and MDC will be balanced
such that there is no incentive to change.

• Recall that Equilibrium is a situation where market forces are balanced

such that there is no incentive to change.

• Hence, as long as MDC and MAC are equal, there is no incentive to

change.

6/5/2024 SET BY M.A 24

 Con’t…

6/5/2024 SET BY M.A 25

 Con’t..

• The Ecologist operates at X (cost) because they have zero

tolerance for damage due to pollution.

• The Capitalist; on the other hand, operate at Y (Quantity of

pollution) because it is cheaper to pollute than to have
pollution abatement.

• The economic optimum occurs where MAC =MDC (or at Q*).

• At this point, the damage is not zero, nor the amount be paid
for contorting is zero.
6/5/2024 SET BY M.A 26
 Con’’t….
 Total pollution control cost (TPCC); is represents direct monetary

expenditure by the society for the environmental protection in order to

improve the environmental quality.

 Total pollution damage cost (TPDC); is the total value of all various

damage results from discharging untreated waste in to the

environment.

 Total Waste Disposal Cost (TWDC); the summation of the above

two costs.

6/5/2024 SET BY M.A 27

 Factors affecting MAC

Production technology

Technology of pollution control

Input use

Pollutant

Or residual recycling methods.

6/5/2024 SET BY M.A 28

 Factors affecting MDC

Change peoples preference for environmental quality

Changes in population

Discovery of new treatments for damage

Change in the nature of the assimilative capacity of the

environment

6/5/2024 SET BY M.A 29

 5.3. Pollution Control: Instruments
• Criteria for choice of pollution control instruments
Criteria for selection of pollution control instruments
Criterion Brief description
Cost-effectiveness Does the instrument attain the target at least cost?
Does the influence of the instrument strengthen, weaken or
Long-run effects remain constant over time?
Does the instrument create continual incentives to improve
Dynamic efficiency products or production processes in pollution-reducing ways?
Does the use of the instrument allow for a ‘double dividend’ to
Ancillary benefits be achieved?
What implications does the use of an instrument have for the
Equity distribution of income or wealth?
To what extent can the instrument be relied upon to achieve the
Dependability target?
Is the instrument capable of being adapted quickly and cheaply
as new information arises, as conditions change, or as targets
Flexibility are altered?
Costs of use under How large are the efficiency losses when the instrument is used
uncertainty with incorrect information?
How much information does the instrument require that the
Information control authority possess, and what are the costs of acquiring
requirements it?

6/5/2024 SET BY M.A 30

 Pollution Control, Policy Measures
• The techniques used by regulatory agencies, such as the Environmental
Protection Agency (EPA), to control pollution range from charges for
the right to pollute to regulations that impose limits to the amount of a
pollutant.

• Among these are the following:

Emission Standard

Emission Charge

Transferable Emission Permits

6/5/2024 SET BY M.A 31

 I Emission Standard
• An emissions standard is a legal limit on the amount of a
pollutant that an individual source is allowed to emit.
• Similarly, it is limits established by government on the
annual amounts and kinds of pollutants that can be emitted
into the air or water by producers or users of certain products.
• This is referred to in the literature as the "command and
control approach.“
• A uniform standard is not cost-effective in this case.
• It is unlikely that the government would be able to determine
the cost-effective allocation.
6/5/2024 SET BY M.A 32
 II: Emission Charge
• An emissions charge is a fee, collected by the government, charged
on each unit of pollution emitted.

• It is better than emission standards in a number of ways:

• The firms now control in the least cost manner relative to each
other, without the government knowing the costs of pollution
control for each firm.

• An iterative method can be used to achieve the efficient allocation

by comparing the pollution abatement goal with actual impacts.

6/5/2024 SET BY M.A 33

 Con’t…
• Firms have an incentive to adopt new technologies in

pollution control,

• while standards create incentives for firms to hide new

control technologies.

• The problem with emissions charges is that finding the

efficient level can be costly and time consuming.

6/5/2024 SET BY M.A 34

 III: Transferable Emission Permits
• Under a transferable emissions permit system, all sources are required

to have emissions permits matching their actual emissions, with each

permit.

• Specifying how much the firm is allowed to emit and

• Being freely transferable.

• Under this system the control authority issues exactly the number of

permits needed to produce the desired emissions level.

6/5/2024 SET BY M.A 35

 Con’t
• Severe monetary permit are imposed upon sources

polluting in excess of the amount allowed by its permits.

• Notice that trading yields the most cost-effective

allocation of clean-up among the two firms.

• Initial allocation of permits does not affect efficiency: it

only has distributional consequences.

6/5/2024 SET BY M.A 36

 Con’t..
• Question: What are the distinctions among standards, permits, and
charge systems?

• Standards are not only information intensive or likely no cost effective,

• but they also are less likely to encourage innovation in pollution

control.

• Permit systems adjust automatically, while the charge system must

repeat to a solution

• Charges will not react to inflation unless they are modified.

• Permits will automatically adjust.

6/5/2024 SET BY M.A 37

 Con’t…
• Permits will not enable technological change in pollution control to
alter the overall level of pollution, but a charge system will.

• Problems for charges versus permits:

• Charges do not react to changes in the number of sources.

Adding sources will not change the permit result, just the value
of the permits being traded.

Adding sources will increase pollution in the absence of changes

in the charge system.

6/5/2024 SET BY M.A 38

 5.4. Pollution policy with imperfect information

• The words risk and uncertainty are often used to characterize various
situations in which less than complete information is available.

• Risk is usually taken to mean situations in which some chance process is

taking place in which the set of possible outcomes is known and
probabilities can be attached to each possible outcome.

• However, it is not known which possible outcome will occur.

• Alternatively, all that may be known is what could occur (but not
probabilities), a situation often described as uncertainty.

6/5/2024 SET BY M.A 39

 con’’t….
• A more extreme case – sometimes called radical uncertainty –
concerns circumstances in which it would not be possible even to
enumerate all the possible outcomes.
• Difficulties in identifying pollution targets in the context of
limited information and uncertainty.

• In discussing efficiency-based pollution targets, we implicitly

assumed that the policy maker was well informed, and so either
knew – or by an investment of resources could discover – the
relevant cost and benefit functions.

SET BY M.A
6/5/2024 40