Upcoming in Class

1. Upcoming in Class Homework #3 Due Thursday Quiz #2 Next Thursday Sept. 29th Homework #4 Due Tuesday Oct. 11 Exam #2 Tuesday Oct. 11 Writing Assignment Due Oct. 27th

2. Homework #3 • Assume the marginal cost of controlling a pollutant is constant, i.e., it does not vary with the level of output, and the marginal damage cost associated with this same pollutant increases at a constant rate. • A) Illustrate this situation graphically and identify the cost-minimizing level of the pollutant. • B) Now assume that as a result of a change in market conditions, the cost of one of the inputs (which accounts for 25 percent of marginal abatement costs) to pollution control doubles, ceteris paribus. Graphically illustrate the effect of this change on the efficient quantity of the pollutant.

3. Question 2 • Based on Horizontal and Vertical Zonal Characteristics, how would you classify the following pollutants (ie. Local vs. Regional, Surface vs. Global) • BP Oil Spill in the Gulf of Mexico  • Cigarette Buds outside Stevenson Hall • Cigarette Smoke outside of Pub II  • CO2 Emissions in the World • Polychlorinated Biphenyls (PCBs) in Lake Michigan by the Outboard Marine Corp.

4. Marginal Costs ofPollution Damage and Control

5. Q* = socially efficient level • Finding Q* is difficult • Damage Costs are difficult to estimate • Firms have incentive to state control costs higher than they are • Examples, • Auto-industry fought against controlling car emissions • Electricity industry estimated the cost of controlling SOX as much higher than was true

6. Pollution Classification Point pollution – pollution emitted from an identifiable source, such as smokestacks or waste pipe Non-point – pollution difficult to identify as originating from a particular source, such as groundwater contamination from agricultural chemicals used over a wide area

7. Pollution Standards • Set standard based on other criteria • Safe for human use or consumption • Safe for human recreation • Ecological health • Regulate all polluters to meet the same standard • Cost-Effectiveness – choosing a policy that minimizes the cost of meeting a set standard.

8. National Ambient Air-Quality Standards

9. Conventional Pollutants Conventional pollutants are common substances such as sulfur oxides, particulates, carbon monoxide, ozone, nitrogen dioxide and lead. They are thought to be dangerous only at high concentrations. EPA must show scientific proof and empirical evidence that these pollutants caused damage at a specified level

10. Emission Standards • AKA – Command and Control System • Advantages – • Easy to see clear result. • Good for pollutants that pose a clear hazard • Disadvantages – • Not flexible

11. Emission Charges • An emission charge is a per-unit of pollutant fee, collected by the government. • Charges are economic incentives. • Each firm will independently reduce emissions until its marginal control cost equals the emission charge. This yields a cost-effective allocation

12. A Per-Unit Chargefor Pollution Emissions

13. Emission Charge • Advantage – • Market based • Firm more efficient at controlling pollution have a competitive advantage • Firm reaches economic efficiency • Disadvantage – • determining how high the charge should be set in order to ensure that the resulting emission reduction is at the desired level.

14. A Transferrable Pollution Permit System • Firms are allocated X number of permits • A permit represents the right to pollute 1 ton of SOx. • Firms can buy and sell permits. But firm sells their permits, they can no longer pollute and must control their pollution instead.

15. Example – 2 Polluting Sources • Natural Gas Power Plant • 15 tons of CO2 • Suppose we determine that to maintain clean healthy air, we need to reduce emissions by 15 tons total. • Who should reduce emissions? By how much? Coal Power Plant 15 tons of CO2

16. Cost-Effective Allocation of a Uniformly Mixed Pollutant

17. Reading Figure 15.3 • X-axis is the amount of emissions to reduce • Points between represent the shared responsibility between the two sources • These MC curves are the marginal control costs the source faces • Damage costs – externalities • Control costs – not external

18. Cost-Effective Allocation • Minimizes the control cost between the two sources • Cost Effectiveness Equimarginal Principle • Cost of achieving a given level of reduction is minimized when • MC1=MC2=MC3=..=MCX • Marginal costs of all emitters are equal

19. Example – 2 Emitters MCcoal = 10 + ½ * Qcoal-CO2 MCng = 5 + Qng-CO2 Each firm currently emits 100 tons of CO2 The government wants the to reduce overall emissions to 150 tons of CO2 QCO2 = Qcoal-CO2 + Qng-CO2

20. Upcoming in Class Homework #3 Due Thursday Homework #4 Due Tuesday Quiz #2 Next Thursday Writing Assignment Due Oct. 28th