Chapter 17. The Economics of Pollution Control

Transcription

1 Chapter 17 The Economics of Pollution Control

2 Economic Rationale for Regulating Pollution Pollution as an Externality -pollution problems are classic cases of a negative externality -the MSC of production in this market exceeds the MPC since the latter does not include the MEC of the pollution emissions associated with output production $ MSC S = MPC D = MPB = MSB 0 Q* Qm Q

3 -this problem can be corrected if the parties internalize the externality -the result would have the full social costs of production taken into account -we have discussed the possible private solutions (merger, negotiation and the Coase Theorem) -what if none of these work or are applicable? -there is a role for government policy to correct this market failure Note: -the market output level Q m > Q* (and therefore the level of pollution emissions) is inefficiently high DWL(Q m ) -but the optimal level of output and therefore the optimal level of pollution emissions is not generally zero, that is, 0 < Q* is inefficiently low DWL(0)

4 -are there conditions under which the optimal level of output and therefore pollution emissions is actually zero? -yes, when: $ S = MPC D = MPB = MSB 0 Qm Q

5 The Optimal Amount of Pollution Abatement -instead of talking about the production of a certain good and its associated pollution emissions (a bad) it is useful to recast the problem in terms of pollution abatement (reduction) itself (a good) Why? -there may be ways to abate emissions other than reductions in output -installing cleaner production technologies -it allows us to consider multiple sources of emissions for a given pollutant in multiple industries (viewed in our previous context it is like we are measuring emissions along the Q-axis and measuring abatement from Q m backwards along the axis toward the origin)

6 $ MCA MBA 0=Am A* A (Emissions Abatement) MBA marginal benefit of abatement - saved external costs from emissions MCA marginal cost of abatement -money spent to reduce emissions or value of lost output -unregulated market abatement A = A m = 0 -DWL -efficient abatement occurs at A* where MBA = MCA

7 Pollution-Control Policies -there are several approaches that can be used Direct Controls -tell each source of emissions how much they must abate command and control system -may well be the best policy when we want zero emissions ( abate-all ) -can be backed by criminal law -if there was only a single source of emissions it would seem workable -ie. tell the firm to abate A* -but when there are multiple sources of emissions, direct controls usually take the form of setting the same target for all -all must abate the same amount or the same percentage -but efficient abatement involves equalized MCA across sources

8 EXAMPLE: two sources $ MCA1 MCA2 MBA A 1* A A 2* Ai -if direct controls force both firms to abate A each, then even if the total is the same as the efficient total (A 1 * + A 2 * = 2A ) we have DWL in the allocation of abatement

9 Emissions Taxes (Pigouvian or Corrective Taxation) -if a firm faces a tax t per unit of emissions then it will abate emissions when it is cheaper to do that or emit and pay the tax when that is the cheapest thing to do -it will abate until MCA i = t -that is abatement becomes a function of the tax rate: -so if the regulator sets the tax t* = MBA -we get efficient abatement -both in total and in its allocation across sources

10 Tradable Pollution Permits -each permit allows a source to emit a unit of emissions so a source s emissions are limited to the number of permits it has -if the regulator sells or grants the correct number of permits (ie. permits such that total abatement is equal to A*) then, after trade in permits, the result is an efficient total, and an efficient allocation, of abatement (ex A 1 * and A 2 *) -permit price will equal p* = MBA = MCA i -a firm will abate emissions when it is cheaper to do that or buy a permit and emit when that is the cheapest thing to do -that is, it will abate until MCA i = p, so firm abatement is a function of permit price: A i = A i (p) -a firm s demand for permits is equal to: D i = E i m A i (p), where E i m is the firm s unregulated emissions -market demand is horizontal sum: D = (E i m A i (p)) = E m A(p)

11 -if the government sells the efficient number of permits, E m A*, then: -price will equal p* = MBA -total abatement will equal A* -each firm will abate its A i * $ S p* D 0 E m -A* Permits

12 -if the government grants permits under a cap and trade system then it doesn t matter if it gets the initial allocation correct -firms will trade emissions until the efficient allocation results -suppose that two firms have each been granted permits such that each would have to abate A units of emissions -ie. each firm has X = E m A permits -if MCAs are different given this allocation of permits, trade in permits will take place until MCAs are equalized $ MCA1 MCA2 MBA A* 1 A A 2* A

13 -the difference in valuation of the marginal permit at the allocation {A, A } makes trade of a permit from source 2 to source 1 potentially profitable for both -continues until the allocation of permits is the efficient one {A 1 *, A 2 *} -efficiency characteristics are the same no matter how permits are initially allocated -but distributional characteristics are very different

14 Technological Change -both the efficient tax and the efficient permit system approaches internalize the externality -firms take into account the external costs of emissions at the margin -both also provide an incentive for (potentially costly) innovation to reduce abatement costs -under the tax system - MCA i A i lower taxes paid -under the permit system - MCA i A i fewer permits need be purchased or some sold -also provides a signal of the tech change -under the tax system the firm pays t(e m A i ) in emissions taxes if A i rises, tax revenue to gov t falls -under the permit system, if A i (p) rises for any given price, then the permit price will fall -the regulator may want to use this information and revisit the total number of permits or the tax level

15 Uncertainty with Taxes/Permits -uncertainty regarding abatement costs -taxes: abatement will be uncertain $ MCA t A A -permits: demand for permits and therefore firm costs will be uncertain $ S p D 0 E m -A Permits

16 The Economic Challenge of Climate Change -pretty straightforward, for reading -some things to keep in mind -our discussion of pollution control assumes -agreement about costs/benefits -a single authority able to enforce the regime -climate change is different mostly due to its global nature requires multi-national negotiation and enforcement -past successes/failures in externality situations shed some light on the issues: -acid rain problem addressed by Canada and the US only two parties to negotiate -ozone depletion relatively cheap fix to problem -cod fishery problem not solved until cod was gone two many parties involved?