INTERNATIONAL POLLUTION

1
INTERNATIONAL POLLUTION

• Pollution, like a weed, is simply matter out of
  place.

2
Recall our Earlier Picture of The Economy and
Nature
FIRMS
NATURE AS A SINK FOR WASTES FROM
ECONOMIC ACTIVITY
wastes
NATURE AS A SOURCE OF INPUTS FOR
ECONOMIC ACTIVITY

commodities
labor



HOUSHOLDS
wastes
3
All firms produce goods but some of them
produce bads.

• That is, a good is something we value and want to
  have. That is what firms do for us.
• While a bad is something we do not value and we
  wish we did not have to endure it.

4
The difference between goods and bads is not
always obvious.

• That is, the good aspect is usually immediately
  apparent to us
• While the bad aspects may appear only later

5
Consider the automobile

• When first introduced the good aspects seemed
  obvious
• You only had to feed a car when you used it,
  while horses had to be fed every day
• And of course automobiles did not deposit stuff
  in the road that had to be shoveled away.

6
And of course the stuff coming out of the exhaust
pipe was not imagined, at the time, to be a
problem

• How could we know it was a problem?
• We had never experienced automobile exhaust
  before.
• And when there were few automobiles there was not
  much exhaust.
• So the bads seemed minimal along side of the
  many conveniences offered by automobiles.

7
Factories produce many things that we want, and
for some time, the nature of their discharges
into rivers and lakes was certainly not apparent
to us.Nor did we worry much about what came out
of their smokestacks and drain pipes.

• We saw the good things, and were largely
  oblivious to the by-products of their actions.

8
Consider an industry consisting of factories
making something good but also giving rise to
something bad. Here we see the effects of both a
clean and a dirty technology used by the
firms in this industry.

S
D
Quantity of goods
QC
Clean Technology
QD
Quantity of bad stuff
Dirty Technology
9
That is, for any given level of production by the
factories in this industry there can be lots of
bad stuff produced, or there can be very little
bad stuff produced.

• The difference between lots of bad stuff produced
  and not very much bad stuff produced is,
  predictably, a matter of costs.
• As long as firms can dump their unwanted waste
  products in the nearby river or lake (or into the
  atmosphere) they can save a great deal of money
  that they might otherwise have to spend in order
  to eliminate those unwanted discharges.

10
So the issue here is one of firms being able to
shift costs to others in the form of untreated
pollutants.

• The idea of COST SHIFTING is at the core of what
  economists call EXTERNALITIES.
• We call them externalities because these costs
  are external to the firm.
• Firms must buy their labor needs, their energy
  needs, their raw materials, and the other
  services they require (tax advice, legal
  services, insurance) from other firms and that
  purchase is always mediated by a price.

11
However, as long as there is a river nearby, and
as long as there is no law against putting your
wastes (gunk) in that river, then you have
avoided a serious cost obligation, and in doing
so you have shifted costs to someone else.

• These shifted costs are external to your
  accounting inside the firm
• These shifted costs are external to your own
  calculations of how to do business
• These costs fall on external parties.
• This is why economists call them externalities.

12
The Concept of Pollution DamagesThree Damage
Functions in Monetary Terms


A
B
Absorptive capacity
EMISSIONS
EMISSIONS

C
EMISSIONS
13
Let us now consider pollution damages in greater
detailhere we show the marginal costs of
emissions
Damage costs in
MD2
MD1
Total damages From MD2 a b Total damages
from MD1 b
a
b
Emissions per year (tons)
E1
14
Why does MD2 lie above MD1?

• MD2 could reflect a more toxic pollutant being
  discharged
• MD2 could reflect more people adversely affected
  by the pollutant

15
The firm (a factory) is able to avoid costs by
disposing of waste products into a river, and
this disposal creates damages (costs) for others.

• Of course the firm could, if it wished, incur
  costs in order to clean up its waste products
• But doing so will cost money
• How might we depict this?

16
We would treat this as a category of abatement
costs

Marginal abatement costs
Reduced Emissions
Current Emissions
17
Let us now put together the marginal damages of
pollution and the marginal abatement cost of
pollution

Marginal damage costs (MDC)
Marginal abatement costs (MAC)
Total remaining damages at E
Cost per unit
Total abatement costs to reach E
No Emissions E
Current Emissions
18
The solution point here is where the marginal
abatement cost (MAC) is brought into equality
with the marginal damage costs (MDC) as we move
to the left (reducing pollution of the
environment).

• At this point MAC MDC, implying that if the
  firm were to spend one more 1 to clean up
  pollution (moving to the left in the figure), the
  benefits of that expenditure in terms of reduced
  environmental damages would be less than the
  necessary costs to reduce those damages. Going
  beyond (to the left of this point) would not make
  economic sense.
• We would say that MAC MDC defines efficient
  level of pollution.

19
Efficiency looked at in another way.

• Notice that at the current level of emissions
  (far to the right) total pollution damages are
  shown by the entire area under the MDC curve.
• Notice that as firms start to undertake internal
  abatement of pollution we move to the left in the
  figure and that at the far left (zero emissions)
  total costs of removing all pollutants are shown
  by the area under the MAC curve.
• One way to regard this dilemma is to ask how far,
  exactly, we should encourage (force) firms to
  move in the interest of reducing pollution?

20
Of course there are plausible reasons to force
them to eliminate all pollution.

• This urge can be defended, perhaps, on grounds of
  moral outrage,
• But it would be difficult to defend this urge on
  economic criteria.
• To see this, notice that reducing pollution
  beyond E (that is, moving to the left of E)
  would entail the spending of money on abatement
  along the MAC curve.
• However notice that to the left of E the
  marginal cost of reducing pollution is in excess
  (lies above) the marginal reduction in pollution.
  In other words, moving to the left of E is to
  spend more on reducing pollution than it is worth
  in terms of pollution damages avoided by that
  reduction.

21
This brings us to the realization that there are
two ways of considering the point E

• As previously E is that point of equality
  between the marginal costs of removing one more
  unit of pollution from the stuff that the firm
  dumps in a nearby river and the reduced damages
  from NOT dumping that unit of pollution in the
  river.
• But notice that E is also the point where the
  total costs of removing pollutants plus the total
  costs of damages from the remaining pollution are
  as small as possible.
• There is no other level of pollution reduction
  for which this can be said.

22
Here it is again. Notice that any movement away
from E violates the two conditions (1) MAC
MDC and (2) total costs of abatement plus
remaining damages be minimized.

Marginal damage costs (MDC)
Marginal abatement costs (MAC)
Total remaining damages at E
Cost per unit
Total abatement costs to reach E
No Emissions E
Current Emissions
23
Consider another way of looking at this figure.

• We can regard the curve MDC as the demand curve
  for improved environmental quality (for reduced
  pollution).
• It is a demand curve because it shows the
  value of additional units of improved
  environmental quality.
• That is, the curve shows the worth (value) of
  less pollution and thus of more environmental
  quality.
• In essence, we are buying more environmental
  quality and the MDC shows us the willingness to
  pay for that improved condition. It is our
  willingness to pay because it shows the value
  of reduced pollution as we move to the left.

24
If we accept the idea that the MDC is analogous
to a demand curve for improved environmental
quality, then the supply side of this issue
focuses on the costs of providing more
environmental quality. The cost of increased
environmental quality is precisely depicted by
the MAC function.

• That is, firms can supply more environmental
  quality (more pollution abatement) according to
  the cost schedule depicted by MAC
• In familiar terms, the efficient level of
  abatement is where the demand for improved
  environmental quality (MDC) equals the supply of
  improved environmental quality (MAC). That is,
  MDC MAC.

25
Here it is again.

Marginal damage costs (MDC)
Marginal abatement costs (MAC)
Total remaining damages at E
Cost per unit
Total abatement costs to reach E
No Emissions E
Current Emissions
26
WE NOW TURN OUR ATTENTION TO INTERNATIONAL RIVERS

• THE PROBLEMS OF COLLECTIVE ACTION

27
International rivers are difficult environmental
challenges because of the one-way flow of water
and thus of the damages from upstream pollution.

• Inside of a nation, where law is given effect
  (enforcement) by a judiciary and the executive
  branch (the Environmental Protection Agency),
  rivers that pass through several jurisdictions
  (Wisconsin, Illinois, etc) are regulated by the
  larger entity of the federal government.
• Those of us in Wisconsin are not free to pollute
  such rivers and allow the damages to accrue
  downstream (in Illinois).
• In effect, the rivers in Wisconsin do not belong
  to the residents of Wisconsin but to the entire
  nation.

28
But this is not the case for international rivers
for the simple reason that there is no
supra-national judiciary and executive agency to
force nations to be nice to natureand thus to
their downstream neighbors.

• One way to think of this is that international
  law is a contradiction in terms.
• And why do I say this? Because law requires not
  just rules but enforcement of those rules.
• In the international realm there is no
  enforcement mechanism.
• This is why in the international realm we have
  such things as treaties, conventions, protocols,
  and agreements. But the one thing we do not have
  is laws.

29
Let us now consider pollution that moves from one
jurisdiction (one country) to another and
therefore creates a serious political challenge.

• We will assume that there is one upstream nation
  and several downstream nations.
• The upstream nation allows its firms to discharge
  pollutants into a river that then flows through
  the downstream nations until emptying into the
  sea.
• This means that there are pollution damages in
  the upstream country as well as in the downstream
  recipients of its pollution. Assume that none of
  the downstream nations dumps any pollutants.

30
THE UPSTREAM-DOWNSTREAM PROBLEM

MDDS
MDP
MACP
h
c
i
e
d
a
g
f
b
E EP Emissions
of Country P
31
As previouslyMACp is marginal abatement costs
in the polluting countryMDp is marginal damage
in the polluting country andMDDS is the
marginal damage in the downstream countries.We
know that if the upstream polluting country is
only concerned about the pollution damages in its
own country then it will seek to reduce emissions
to the point EP.At this point a serious problem
remains.
32
Specifically, moving from Ep to E would reduce
damages in the polluting country by the amount f.
However, we see that moving from EP to E would
not be desirable for country P since to the left
of EP we see that the marginal costs (along MACP)
are greater than the marginal benefits in terms
of reduced pollution damages (MDP). That is,
MACP lies above MDP. Moving to the left of EP
would mean that country P would be paying more
than it is worth to reduce pollution.But there
is another way of looking at this problem.
33
This alternative perspective reveals that the
several downstream countries harmed by country
Ps pollution have the ability to make country P
reconsider its calculations.That is, consider
the two regions d and c.We see that the region
d c represents the total reduction in pollution
damages (benefits of pollution reduction) in the
downstream countries.We also see that if
country P were indeed to undertake pollution
control all the way to E then its total costs
would be d f, while the total benefits of
pollution reduction within country P plus in the
downstream countries would be c d f.
Suddenly we see an opportunity to solve this
problem.
34
That is, if all of the countries (the polluting
one plus its downstream victims) could but act
collectively (cooperatively) we see the economic
reality of fixing this vexing problem.Total
benefits to the entire group of moving from EP to
E are represented by c d f.Total coststo
be paid entirely by country Pare d f.If we
put this in a benefit-cost framework we would
find the NET benefits of collective action. That
is BENEFITS COSTS NET BENEFITS OF
COLLECTIVE ACTION
35
This can be represented asc d f d
f cIn other words, the amount c is a net
economic surplus that can be used by the
downstream countries to induce (bribe) country
P to undertake greater pollution reduction than
it would be inclined to do in the absence of this
downstream pressure (and financial
inducement).Notice that as long as c is greater
than d then this will be enough to induce the
polluting country to move to the left of EP.
This is true because country P will gain
pollution reduction benefits of f but in the
absence of the payment from downstream countries
this reduction would not be undertaken since the
marginal cost of getting to E is greater than
the marginal reduction in pollution.
36
The collective action discussed here would not be
forthcoming without some way to make sure that
all of the downstream countries agree to
contribute something to the upstream polluting
country.In addition, there will need to be much
effort devoted to how, exactly, payment of the
inducement cost c is to be shared among the
downstream countries.Usually, such squabbles
and disagreements are sufficient to preclude
effective collective action, and so international
rivers continue to carry massive pollution loads.
37
There are several examples of successful river
compacts or treaties. Two stand out because
they involve a relatively few countries of
similar socio-economic circumstances. Indeed
Finland was, at one time, part of (ruled by)
Sweden.

• The Rhine River Commissions
• The Finnish-Swedish Frontier Rivers Commission

38
Sadly, the norm is that such arrangements are
largely ineffective. The troublesome ones are

• The Colorado River Commission (U.S. and Mexico)
• The Danube River Commission (17 countries in
  western and central Europe)
• The Zambezi River in Africa (Zambia, Angola,
  Namibia, Zimbabwe, Mozambique, Tanzania,
  Botswana, and Malawi)
• The Niger Basin Authority in Africa (Guinea, Cote
  dIvoire, Mali, Niger, Burkina Faso, Benin,
  Nigeria, Cameroon, and Chad).
• The Plata Basin in South America (Argentina,
  Bolivia, Brazil, Paraguay, and Uruguay).