Upcoming in Class

1. Upcoming in Class Homework #3 Due Monday (Sept. 21) Quiz #2 Next Wednesday Writing Assignment Due Oct. 23rd

2. Chapter 16 • From this chapter on, two questions will be addressed: • 1) How much pollution is ‘good’? • 2) What are the appropriate means for pollution reduction? • Today, we will • Categorize pollutants. • Define an efficient allocation of pollution. • Compare the marginal damage costs and the marginal control costs.

3. Efficient Allocation of a Fund Pollutant

4. Efficient Allocation of a Fund Pollutant What is the gain in net benefit to society for producing at Q* rather than Qmax?

5. A Pollutant Taxonomy • A substance is a pollutant only if the emissions load is greater than the absorptive capacity.

6. A Pollutant Taxonomy • Absorptive Capacity Classifications • Stock pollutants are pollutants for which the environment has little or no absorptive capacity. • Examples – Non-biodegradable material (plastic), heavy metals (mercury), persistent synthetic chemicals (PCBs) • Fund pollutants are pollutants for which the environment has some absorptive capacity. • Examples - Pharmaceutically active compounds (anti-biotics, steriods, hormones), greenhouse gases (CO2), volatile organic compounds (CFC’s)

7. Defining the Efficient Allocation of Pollution Stock Pollutants • Damage rises as the pollutant accumulates over time, which require us to use a dynamic model. • The optimal allocation of a stock pollutant is the one that maximizes the present value of benefits from consuming the good whose production causes the pollution minus the cost of damage to the environment caused by the pollutant.

8. Defining the Efficient Allocation of Pollution Fund Pollutants • We can use a static model because current emissions cause current damage and future emissions cause future damage (i.e. damage in each period is independent of last period’s damage) • Pollution control is most easily analyzed from the perspective of minimizing cost. • Damage costs • Pollution control or avoidance or abatement costs.

9. The Efficient Level of Precaution

10. Caveats • The cost-minimizing solution is found by equating marginal damage costs to marginal control costs (or at Q*). • What is cheapest for the firm is not always what is cheapest for society as a whole. • Firms that attempt to control pollution unilaterally are placed at a competitive disadvantage. • The market fails to generate the efficient level of pollution control and penalizes firms that attempt to control pollution.

11. Policy Options • Emissions Standard • Limit the amount of pollution of an emitter • Emissions Charge • Increasing tax • Constant tax • Policy Problems • Must know q* for every emitter • Must know MAC, MDC for every emitter

12. Cost-Effective Policy Options • Set standard based on other criteria • Safe for human use or consumption • Safe for human recreation • Ecological health

13. Welfare under Pollution Emissions

14. A Transferrable Pollution Permit System • AKA – cap and trade • Firms are allocated a fixed number of permits • A permit represents the right to pollute 1 unit of pollution. • Firms can buy and sell permits. But if a firm sells its permits, it can no longer pollute and must control their pollution instead.

15. A Pollutant Taxonomy • Zonal Classifications • Pollutants on the Horizontal Dimension • Local pollutants cause damage near the source of emissions. • Regional pollutants cause damage at greater distances. • Pollutants on the Vertical Dimension • Surface pollutants cause damage from high concentrations near the earth’s surface • Global pollutants cause damage from high concentrations in the upper atmosphere

16. Pollutant Taxonomy Uniformly mixed – any pollutant emitted by many sources in a region resulting in relatively constant concentration levels across the region (SOx, CO2) Non-uniformly mixed – pollutants that cause different impacts in different areas, depending on where they are emitted (water pollution from factories, sewage, and runoff from agriculture)

17. Pollution Taxonomy Point source pollution – pollution that is emitted from an identifiable source such as a smokestack Nonpoint source pollution – pollution that is difficult to identify as originating from a particular source, such as groundwater contamination from ag. chemicals

18. Upcoming in Class Homework #3 Due Monday (Sept. 21) Quiz #2 Next Wednesday Writing Assignment Due Oct. 23rd