Pollution Control

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 gt benefit-cost
  analysis
• MCMB (Prior to Midterm)
• More modest criterion cost-effectiveness does
  policy accomplish given purpose in the least
  costly way?
• MC1MC2

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 induce invention 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 contd
Change in pollution Private gains
Pollution Tax Pollution will decrease Reduced MC avoided tax
Tradable Permit No change Reduced MC cheaper permits
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 were
  wrong)
• If the slope of MC is relatively large, then we
  want to give firms flexibility (compliance is
  very costly if were 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
Q
Qtax
QTP
25
Example 2

DWL TP
MB
MCR
DWL tax
MCE
T
Q
Q
Qtax
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