Economics of Pollution Control: Overview
I. Pollution taxonomy
A. Stock pollutants--environment has little or no absorptive capacity.
B. Fund pollutants--environment has some absorptive capacity.
C. Global pollutants--those that are in upper atmosphere
D. Surface pollutants--those on surface or near the surface
II. Efficient levels
A. Maximizes present value of net benefits.
B. Allow it to rise over time until reach damage level same as exhaustion of a mineral; treat them
like depletable resources.
C. Fund pollutants.
Marginal Damage Cost
Qo Q1 P
D. For overall efficiency in a system, economics suggests that an acceptable level of pollution be
achieved. Since we cannot live without some pollution, achieving a zero level of pollution
would be an unacceptable level. Acceptable pollution levels differ from one pollutant to
another. For pollutants that are highly toxic, zero levels are appropriate. For those that are
not threats to human life some non-zero level of pollution is acceptable. Economics has often
referred to these levels as optimum levels. We must remember that one of the greatest
resources nature provides is the system to eliminate undesirable levels of pollution through its
natural processes. Nature herself pollutes and eliminates pollution.
E. In the graph above, a uniform pollutant increases as we move to the right along the horizontal
axis and costs (damage or control costs) increase as we move upward.
1. Society feels that costs of one sort are as bad as costs of another sort. We do not like
either damage or treatment costs because they limit our options.
2. Society tries to reduce total damage plus treatment costs to a minimum.
3. Area under the marginal cost curves up to some point measure total costs. (If we add the
damage costs of the first unit of pollution to those of the second unit of pollution to those
of the third unit of pollution etc., we are arriving at total damage costs; this adding
process is one of adding areas under the damage function).
4. Total damage costs at Qo is area shown by OCQo.
5. Total treatment costs at Qo is area PCQo.
6. Total treatment and damage costs is area OCPO.
7. Optimum pollution occurs when the marginal costs of treatment equal the marginal costs
of damage. At this point total costs are minimized. (area OCPO is at a minimums). This
occurs at pollution level Qo.
8. Compare, for example, pollution level Q1. This is not optimum because total cost area
OABPO (sum of control or treatment and damage ) are larger than at Qo (area OCPO).
Added costs are area CAB.
III. To efficiently treat pollution (minimize the cost of pollution control) the treatment must proceed
so that the marginal cost of pollution control of each source of pollution is equalized. In the graph
that follows, the marginal cost curves of pollution control differ between the two sources of
MC firm 2 MC firm 1
O1 Q Qe O2 Emissions reduced
A. In this diagram firm one's marginal control costs increase logarithmically as we move to the
right along the graph (as firm one eliminates more and more pollution).
B. Firm two's marginal control costs increase logarithmically as we move to the left from O 2 as
firm two eliminates more and more pollution.
C. Total pollution eliminated on the graph is O1 Q for firm one and O2 Q for firm two (in other
words O1O2. Firm two is eliminating more pollution O2 Q than firm one O1 Q.
D. Total costs of pollution control are the areas A (to the left of Q) for firm one and B (to the
right of Q) for firm 2.
E. Minimum costs of eliminating O1O2 units of pollution is area A+B. Any other way of
eliminating O1O2 units of pollution would cost more. To achieve this pollution control
efficiently, firm two should eliminate more pollution than firm one.
IV. Policies to achieve pollution control. Three different policies have been used in pollution control.
A. Across the board standards or command and control emission standards is the first method
used. A particular standard is set and all firms must meet it. Under this system each firm
would have to eliminate an equal amount of pollution (or firms may be required to not pollute
beyond a certain amount).
B. In the graph above, Qe would require each firm to eliminate the same amount of pollution.
Total costs of pollution control would be larger than A+B (similar reasoning to graph in
section II above).
C. Effluent or emissions tax would be a tax per unit of pollution. A tax of O 1T would lead to the
efficient low cost pollution control amounts of O1 Q for firm one and O2 Q for firm two. As
long as a firm could eliminate the pollution at lower marginal cost than the tax, the firm
would automatically choose to eliminate that unit of pollution. Once the marginal cost of
pollution control exceeds the tax, the firm would pay the tax. Firm one would eliminate O1 Q
units of pollution and firm two would eliminate O2 Q units of pollution. Total cost of
pollution control would be A+B. Additional taxes paid on the pollution units that were
eliminated could be refunded to business by reducing corporate income taxes or other
business taxes. The firm with the low cost of pollution control (firm 2) would eliminate more
pollution but pay less overall tax + pollution control costs. The firm with high costs of
pollution control would eliminate less pollution but pay greater overall total in taxes plus
pollution control costs. Something like effluent taxes are used by many local sewage systems
to recover money for the federal government subsidies to construct their municipal pollution
control facilities (industrial recovery requirement by federal government on municipalities.)
Firms are required to pay per unit of pollution dumped into the sewage system. The pollution
control authorities would have to adjust the tax until they get the desired level of pollution.
D. Permit Trading. The third approach is to use command and control methods (across-the-
board-standards) and then allow companies to buy and sell pollution control (or what is the
same thing buy and sell pollution permits) from each other. In the graph in section III, both
firms would be required to eliminate OQe units of pollution. Firm two may offer to treat QeQ
units of pollution for firm one because it can eliminate them more cheaply than firm one can.
Both can share some of the cost savings. The result is A+B total costs of pollution control.
This is the more popular approach in the US.
V. Non-uniformly mixed surface pollutants.
A. When there are several mixed pollutants and there is a requirement to keep ambient pollution
to a particular level, the effluent tax is not as good as an ambient charge tailored to the
situation. Not only may there be difference in marginal costs of different treatment facilities,
but there is differential influence on the receptor where pollution is measured.
B. In the diagram above, since discharger A is closer in the stream to the receptor where
pollution is measured, it has more influence on the level of pollution at R than does discharger
B. Decreasing pollution at A will be more effective in achieving the ambient standard at R
than decreasing pollution at B.
C. The idea is not to look merely at the marginal cost of reducing emissions at A and B, we must
look the marginal cost of concentration reduction at R. The key is a transfer coefficient which
indicates how much a unit of discharge at A and B affects the level at R. A has a larger
transfer coefficient than B that is it affects pollution levels at R more.
K r ai Ei B
where Kr is the concentration at the receptor.
ai is the transfer coefficient
EI is the emission level at the ith source.
B is the background level of pollution in the stream
D. The marginal cost of concentration reduction is obtained by multiplying the marginal cost of
reducing a unit of pollution at the discharger times the transfer coefficient. For example, if it
costs $3 to reduce a unit of pollution at discharger B but only 1/2 of that unit is transferred to
the receptor at R, the marginal cost of reducing a concentration unit at R is (1/2)($3)=$6 per
E. If at A the cost of reducing a unit of pollution is also $3, but the full unit reaches the receptor
so that that transfer coefficient is 1, the marginal cost of reducing a concentration unit at R
from discharger A is (1)($3)=$3.
F. To approach this situation, the pollution control authority uses an ambient charge
t i a i Fi
where ti is the per unit charge paid by discharger i
ai is the transfer coefficient
Fi is the marginal cost of concentration reduction for the desired level of pollution
G. This implies that if the last unit we wish to eliminate will cost $6 to eliminate from either
source, source A will face a $6 charge and source B will face 1/2($6) or $3 unit ambient
charge. That charge would lead source A to reduce more pollution than source B. There is a
question of equity with these charges since a discharger closer to the receptor is taxed at a
higher level than is a discharger that is further away. If, however, the goal is to change
location of dischargers, this ambient charge may be effective.
H. Ambient permit trading can be an effective way of dealing with the situation as well by
issuing more permits to pollute to firms located further from the receptor (inversely related to
the transfer coefficient).
VI. Other considerations in comparing effluent charges to permit trading: inflation, technical change,
number of dischargers.
A. Pollution permits could still guarantee the amount of pollution does not rise when new
dischargers come on line; effluent taxes would have to be raised.
B. Inflation would require effluent taxes to be raised but would not affect permit trading.
C. When technical change reduces the marginal cost of treatment, the amount of pollution
control would increase with effluent taxes but stay the same with pollution permits.