CHAPTER-5

Economics of pollution control

and environmental policy

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Pollutant Taxonomy
•The amount of waste products emitted determines the load on the
environment.
•The damage done by this load depends on the capacity of the environment to
assimilate the waste products, as given in figure below,

• The ability of the environment to absorb pollutants is called absorptive

capacity:
•If the emissions load exceeds the absorptive capacity then the pollutant
accumulated in to the environment.

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Cont’d…
• Pollutants for w/c the environment has little or no absorptive capacity
are called ‘stock pollutants’.
• Stock pollutants accumulate over time as emissions enter the
environment.
• Examples of stock pollutants include non-biodegradable bottles tossed by
the roadside, heavy metals such as lead, w/c accumulate in the soils near
the emission source...etc.

• Pollutants for w/c the environment has some absorptive capacity are
called ‘fund pollutants’.
• For these pollutants, as long as the emission rate does not exceed the
absorptive capacity of the environment, the pollutants did not
accumulate.

• Many organic pollutants injected into an oxygen-rich stream will be

transformed by the resident bacteria into less harmful inorganic matter.

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Pollution flows, pollution stocks and pollution damage
• Flow-damage pollution occurs when damage results only
from the flow of residuals: that is, the rate at w/c they are
being discharged into the environmental system.

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

damage will immediately 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.

• Stock-damage pollution occurs in w/c damages depend only

on the stock of the pollutant in the relevant environmental
system at any point in time.
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Cont’d…
• For a stock of the pollutant accumulation, it is necessary that the residuals
have a positive lifespan & that emissions are being produced at a rate
w/c exceeds the assimilative capacity of the environment.
• An extreme case is that in w/c the assimilative capacity is zero, as seems
to be approximately the case for some synthetic(unnatural) chemicals & a
number of heavy metals.

• Most important pollution problems are stock-damage pollution w/c affect

human health & life expectancy.

• Pollution stocks are harmful to built structures (buildings, works of art and
so on) & they may adversely affect production potential, particularly in
agriculture.

• Stock pollution levels influence plant & timber growth, & the size of
marine animal populations, & less direct effects operate through
damages to environmental resources & ecological systems.
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• There is another way in w/c stock effects could operate.
• The assimilative capacity of the env’t often depends on the
emissions weight to w/c relevant environmental effect are
exposed.
• This is particularly true when the natural cleaning mechanism
operates biologically.

• In water systems, for example, bacterial decomposition of

pollutants is the principal cleaning agent.
• But where critical loads are exceeded, the biological
conversion process breaks down, & the water system can
effectively become dead.
• Its means, assimilative capacity has fallen to zero.

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• Mixed cases, where pollution damage arises from both flow &
stock effects exist simultaneously.

• Waste emissions into water systems are sometimes modeled as

mixed stock-flow pollutants. So, damages arising from
emissions of compounds such as carbon, sulphur & nitrogen
results mixed stock-flow pollutants.

• However, in these mixed cases, it may often be preferable to

view the problem as one of a pure stock pollutant.
• Using M to denote the pollution flow, A to denote the pollution stock
& 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)
• For simplicity of notation, we shall from this point on call these ‘flow
pollution’ & ‘stock pollution’. 7
Efficient level of pollution
• Given that pollution is harmful, some would argue that only a zero level of
pollution is desirable. But, as we shall see, pollution can also be beneficial,
• Therefore, zero pollution is not economically efficient except in particular
special circumstances.
• So, in what sense is pollution can be beneficial?
• One answer comes from the fact that producing some goods & services
that we do find useful may not be possible without generating some
pollution, even if only a small amount.

• With both benefits & costs, economic decisions about the appropriate
level of pollution involve the evaluation of a trade-off.

• Thinking about pollution as an externality arising from production or

consumption activities makes this trade-off clear.

• The efficient level of an externality is not in general zero as the marginal

costs of reducing the external effect will resemble a certain point, exceed
its marginal benefits. 8
 A static model of efficient flow pollution
• A simple static model; in w/c time plays no role can be used to
identify the efficient level of a flow pollutant. In this model, emissions
have both benefits & costs.
• In common with much of the pollution literature, the costs of
emissions are called damages.
• For simplicity, we suppose that damage is independent of time or
source of emissions & that emissions have no effect outside the
economy being studied.

• An efficient level of emissions is one that maximizes the net benefits

from pollution, where net benefits are defined as pollution benefits
minus pollution costs (damages).

• The level of emissions at w/c net benefits are maximized is equivalent

to the outcome that would prevail if the pollution externality is fully
internalized.
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• In the case of flow pollution, damage (D) is dependent only on the magnitude
of the emissions flow (M), so the damage function can be specified as D=D(M).

• Suppose for the seek of argument that firms were required to produce their
intended final output without generating any pollution.

• This would, in general, be extremely costly (& perhaps even impossible in that
limiting case).

• Therefore, firms make cost minimizing if they are allowed to generate emissions
in producing their goods.

• The larger is the amount of emissions generated (for any given level of
output), the greater will be those cost minimizing.

• For any particular level of output it chooses to make, there will be an

unconstrained emissions level that would arise from the cost minimizing
method of production.

• Symbolically, we can represent this r/nship by the function B=B(M) in w/c B

denotes the benefits from emissions.
• The social net benefits (NB) from a given level of emissions are defined by;
• NB =B(M) −D(M) 10
• Thus, dB/dM is an alternative notation of the marginal benefit of
pollution and dD/dM is the marginal damage of pollution.

• Economists often assume that the total & marginal damage and benefit
functions have the general forms shown in Figure below.
• Total damage is thought to rise at an increasing rate with the size of the
pollution flow, & so the marginal damage will be increasing in M.

• In contrast, total benefits will rise at a decreasing rate as emissions

increase(b/c per-unit pollution abatement(reduction) costs will be more
expensive at greater levels of emissions reduction).
• Therefore, the marginal benefit of pollution would fall as pollution flows
increase.
• It is important to understand that damage or benefit pollution functions
(or both) will not necessarily have these general shapes.
• For some kinds of pollutants, in particular circumstances, the functions
can have very different properties,

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Total & marginal damage & benefit functions, &the efficient level of flow pollution
emissions

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• To maximize the net benefits of economic activity, we require that the
pollution flow, M, be chosen so that,
NB( M ) B ( M ) D ( M )
  0
M M M
B ( M ) D ( M )

• Or equivalently, ( M ) M

• W/c states that the net benefits of pollution can be maximized only where the
marginal benefits of pollution equal the marginal damage of pollution.

• The efficient level of pollution is M* (see Figure below). If pollution is

less than M* the marginal benefits of pollution are greater than the
marginal damage from pollution, so higher pollution will yield additional
net benefits.

• Conversely, if pollution is greater than M*, the marginal benefits of

pollution are less than the marginal damage from pollution, so less
pollution will yield more net benefits.

• The value of marginal damage & marginal benefit functions at their

intersection is labeled µ* see figure below. 13
The economically efficient level of pollution minimizes the sum of abatement &
damage costs

We can think of this as the equilibrium ‘price’ of pollution. This price has a
particular significance in terms of an efficient rate of emissions tax or
subsidy.

However, as there is no market for pollution, µ* is a hypothetical or

shadow price rather than one w/c is actually revealed in market
transactions.
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• The efficient level of pollution is the one that minimizes the sum of
total abatement costs plus total damage costs.
• Notice that in the diagram we have relabeled the curve previously
called marginal benefit as marginal abatement cost.

• The logic here should be clear given our earlier discussion

about the derivation of the benefits of pollution function.

• To confirm this cost-minimizing result, note that at the

efficient pollution level, M*, the sum of total damage costs
(the area C2) & total abatement costs(the area C1) is C2 +C1.

• If too little pollution is produced (or too much abatement is

undertaken) with a pollution flow restricted to MA, it can be
deduced that total costs rise to C1+C2 +C3, so C3 is the
efficiency loss arising from the excessive abatement.

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Modified efficiency targets

• Our notion of efficiency to this point has been a comprehensive one; it

involves maximizing the d/c b/n all the benefits of pollution & all the costs of
pollution.

• But, sometimes, one particular kind of pollution cost (or damage) is

regarded as being of such importance that pollution costs should be defined
in terms of that cost alone.

• In this case we can imagine a revised or modified efficiency criterion in w/c

the goal is to maximize the d/c b/n all the benefits of pollution & this
particular kind of pollution damage.

• Policy makers sometimes appear to treat risks to human health in this way.
So let us assume policy makers operate by making risks to human health the
only damage that counts (in setting targets).

• How would this affect pollution targets?

• The answer depends on the r/nship b/n emissions & health risks.
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 One possible r/nship is that illustrated by inverted L-shaped r/nship in Figure
below.

Setting targets according to an absolute health criterion

• Total (marginal) health risks are zero below the threshold, but at the
threshold itself risks to human health become intolerably large. It is easy to
see that the value of marginal benefits is irrelevant here(w/c means
pollution does not have benefit).
• A modified efficiency criterion would, in effect, lead to the emissions target
being set by the damage threshold alone.
• Target setting is simple in this case b/c of the strong discontinuity we have
assumed about human health risks.
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• It is easy to see why an absolute maximum emission standard is appropriate. But now
suppose that marginal health damage is a rising and continuous function of
emissions, as in Figure below.

• A trade-off now exists in w/c lower health risks can be obtained at the cost of some
loss of pollution benefits (or, if you prefer lower health risks involve higher emission
abatement costs).

• It is now clear that with such a trade-off, both benefits and costs matter. A ‘modified
efficiency target’ would correspond to emissions level MH*.

A ‘modified efficiency-based’ health standard 18