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Pollution Control

Pollution Control. Outline. Topics from lecture: Overview Problem (the problem from section is posted in the handout section of the course website and includes most of the steps) Technology change Uncertainty. Overview. Economic efficiency criterion —> benefit-cost analysis

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Pollution Control

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  1. Pollution Control

  2. Outline Topics from lecture: • Overview • Problem (the problem from section is posted in the handout section of the course website and includes most of the steps) • Technology change • Uncertainty

  3. Overview • Economic efficiency criterion —> benefit-cost analysis • MC=MB (Prior to Midterm) • More modest criterion: cost-effectiveness — does policy accomplish given purpose in the least costly way? • MC1=MC2

  4. More Criteria for Selecting Environmental Policy Instrument 1. Achieve stated goals/standards? 2. Cost-effective? 3. Provide government with information it needs? 4. Monitoring and enforcement possibilities? 5. Flexible in the face of change (in tastes, technology, or resource use)? 6. Dynamic incentives for research, development, adoption, and diffusion of better pollution-control technologies? 7. Equitable distribution of financial and environmental impacts? 8. Purpose and nature of policy understandable to general public? 9. Feasible, in terms of enactment and implementation?

  5. Topic 1: Technology Change • Two questions of interest: • What incentives does the policy give firms to adopt new technologies? • What incentives does the policy instrument provide to induceinvention and innovation?

  6. Cost-Effective Pollution Control Allocations MC $/ton MC1 MC2 T Pollution Control (tons) Qtp Q1 0 15 15 Q2 0 Pollution abated by polluter 2 Pollution abated by polluter 1

  7. Answer to both questions is… it depends on how much polluting firms gain from the new technology. This has three components • Reduction in marginal abatement costs; and • Avoided tax payments; or • Reductions in equilibrium permit price.

  8. Case 1: Tax $ MC MC' T Pollution Abated Q Q'

  9. Case 1: Tax $ Savings from Tech change MC MC' T Pollution Abated Q Q'

  10. Case 1: Tax $ MC MC' T Q Q Q’

  11. Case 2: tradeable permit $ MC MC' Pollution Abatement QTP

  12. Case 2: tradeable permit $ MC MC' Q QTP

  13. Case 2: tradeable permit $ MC MC' Plus cost savings from cheaper permits Q QTP

  14. Technology change cont’d

  15. Technology change: bottom line • Q of pollution will decrease in response to tech change under tax and remain fixed under TP. • Incentives for adoption and innovation depend on case-specific factors (avoided tax, savings from cheaper permits, and related factors).

  16. Uncertainty • What are likely sources of uncertainty about costs and benefits? • Why is there an asymmetry between uncertainty re. costs and uncertainty re. benefits?

  17. Conceptually, the slopes measure the cost of being wrong. • If the slope of MB is relatively large, then we want to lock in the quantity of pollutant (environmental damages are very large if we’re wrong) • If the slope of MC is relatively large, then we want to give firms flexibility (compliance is very costly if we’re wrong)

  18. Example 1 $ MCE MB Q

  19. Example 1 $ MCE MC R MB Q

  20. Example 1 $ MCE MC R T MB Q QTP Q* Qtax

  21. Example 1 $ MCE MC R DWL for tax T DWL for TP MB Q QTP Q* Qtax

  22. Example 2 $ MB MCE Q

  23. Example 2 $ MB MCR MCE Q

  24. Example 2 $ MB MCR MCE T Q Qtax Q* QTP

  25. Example 2 $ DWL TP MB MCR DWL tax MCE T Q Qtax Q* QTP

  26. Benefit Uncertainty $ DWL TP = DWL Tax MBR MBE MC T Q QTp Q* QT

  27. Simultaneous benefit and cost uncertainty $ MBR DWL TP MBE MCE MCR T DWL Tax Q QTp QT Q*

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