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1、Chapter 15 Economics of Pollution Control:An Overview Chapter 15 begins the chapters on environmental economics.Up to this point,the focus has been on resource allocation.Since the use of resources creates waste,the second half of the book/course addresses the questions of:(1)how much waste is appro
2、priate,and(2)what are the appropriate means for pollution reduction?Thus,environmental economics deals with pollution control.This chapter lays the groundwork and defines efficient and cost-effective levels of pollution.1.Introduce a categorization of pollutants.2.Define an efficient allocation of p
3、ollution.3.Introduce graphs of marginal damage costs and marginal control costs.4.Define cost-effective pollution control for both uniformly mixed fund pollutants and for nonuniformly mixed surface pollutants.5.Present policy options for pollution control.6.Compare and contrast emissions charges and
4、 tradable emissions allowances.I.A Pollutant Taxonomy A.The ability of the environment to absorb pollutants is called its absorptive capacity.B.Stock pollutants are pollutants for which the environment has little or no absorptive capacity.Stock pollutants accumulate over time and include things like
5、 nonbiodegradable bottles,heavy metals,and chemicals such as PCBs.C.Fund pollutants are pollutants for which the environment has some absorptive capacity.If the emission rate does not exceed the absorptive capacity,fund pollutants do not accumulate.These include organic pollutants and carbon dioxide
6、.D.Local pollutants cause damage near the source of emissions while regional pollutants cause damage at greater distances.Pollutants such as sulfur dioxide and nitrogen oxide are both local and regional pollutants.Local and regional pollutants make up the horizontal dimension of damage or horizontal
7、 zone of influence.Chapter 15 Economics of Pollution Control:An Overview 89 E.The vertical zone of damage refers to whether the pollution damages are mostly at ground level or if they accumulate in the upper atmosphere.For some pollutants(lead or particulates),damage is determined mainly by concentr
8、ations of the pollutant near the earths surface.For others(ozone depleting substances or greenhouse gases),damage is related to its concentration in the upper atmosphere.F.Appropriate policy responses will vary by the type of pollutant.II.Defining the Efficient Allocation of Pollution This section d
9、efines efficient allocations given that some pollution is a necessary by-product of production and consumption.A.For a stock pollutant,damage rises as the pollutant accumulates.The optimal allocation of a stock pollutant is the one that maximizes the present value of benefits from consuming the Good
10、(X)whose production causes the pollution minus the cost of damage to the environment caused by the pollutant.Thus the efficient quantity of Good X would decline over time as the marginal cost of damage rises.The price of X would also rise over time and the amount of resources devoted to controlling
11、pollution would rise.Stock pollutants create burdens for future generations.B.Fund pollutants can be examined using a static analysis because the level of future damages is independent of current emissions.Time periods can thus be analyzed separately.1.Pollution control is most easily analyzed from
12、the perspective of minimizing cost rather than maximizing the net benefits from pollution.2.Two types of costs associated with pollution are:a.Damage costs b.Pollution control or avoidance costs 3.Marginal damage costs generally increase with the amount of pollution.With small amounts,the pollutant
13、can be diluted in the environment.Larger amounts will tend to cause substantially more damage.This relationship can be represented by an upward sloping function in a graph illustrating marginal cost as a function of pollution emitted.4.Marginal control costs typically increase with the amount of pol
14、lution that is controlled or abated.Since the axis of this graph is pollution emitted,this will be a downward sloping function.This is equivalent to an upward sloping function if the axis were to measure pollution controlled or if the graph is read from right to left as in Figure 15.2.5.The cost-min
15、imizing solution is found by equating marginal damage costs to marginal control costs(or at Q*in Figure 15.2).Points to the left of Q*(greater control)are inefficient because the marginal cost of control is greater than the marginal damage and reflects higher total costs.Likewise,points to the right
16、 of Q*are also inefficient,but now because marginal damage costs are higher than marginal control costs.There is too much pollution.6.The optimal level of pollution would be zero only if the marginal damage cost function is everywhere above the marginal control cost function.An extremely toxic pollu
17、tant would cause this to be the case.Ask your students to try to draw this case.7.Optimal levels of pollution will vary by location and by pollutant.III.Market Allocation of Pollution This section covers the externalities associated with pollution.A.Pollutant damages are externalities.Damages are do
18、wnwind or downstream of the sources(firms)that emit the pollutants.Thus,the uncontrolled market will produce too much.B.Control costs are not externalities.C.Therefore what is cheapest for the firm is not always what is cheapest for society as a whole.90 Tietenberg/Lewis Environmental and Natural Re
19、source Economics,Eighth Edition D.For stock pollutants,the market would commit too few resources to pollution control and the burden on future generations would be inefficiently large.E.Firms that attempt to control pollution unilaterally are placed at a competitive disadvantage.F.The market fails t
20、o generate the efficient level of pollution control and penalizes firms that attempt to control pollution.IV.Efficient Policy Responses A.Efficiency is achieved when the marginal cost of control is equal to the marginal damage caused by the pollution for each emitter.B.One policy option for achievin
21、g efficiency would be to impose a legal limit on the amount of pollution allowed by each emitter.The efficient legal level would need to be set where marginal control costs equal marginal damage costs.C.Another approach would be to internalize the marginal damage caused by each unit of emissions by
22、means of a tax or charge per unit of emissions.The charge could be constant or it could rise with emissions.The efficient charge would be equal to the marginal damage and marginal control cost at the point where they are equal.D.Knowing the level of emission at which these two curves cross is diffic
23、ult at best.Control cost information is not always available to control authorities and damages are extremely difficult to measure.Remind your students about nonmarket valuation covered in Chapter 3.E.In the absence of that knowledge,pollution control authorities could select legal levels of emissio
24、n based on some other criteria such as safety,human health,or ecological health.Once this level is set,the most cost-effective policy can be chosen.V.Cost-Effective Policies for Uniformly Mixed Fund Pollutants This section presents a simple example of a pollution reduction standard and compares and
25、contrasts the various methods available for achieving that standard.First,a cost-effective allocation is defined.Then the available policy options are covered.A.Simple model:1.Assume two emission sources are currently emitting a total of 30 units of emission.2.Assume the control authority decided a
26、mandatory reduction of 15 units is necessary.3.The question then becomes:how should the 15-unit reduction be allocated between the two sources in order to minimize cost?B.Figure 15.3 illustrates the solution to the model.The graph is drawn such that the left-hand vertical axis measures the marginal
27、control cost to emission Source 1,and the right-hand vertical axis measures the marginal control cost to emission Source 2.The horizontal axis is constrained to equal 15measured from either direction.This ensures that any point will represent some combination allocated across the two sources that ad
28、ds to 15.This is equivalent to flipping over the graph for Source 2,creating a box that is the size of the constraint.C.The cost-effective allocation is found by equating the marginal control costs of the two sources.Since total cost is the area under the marginal control cost curve,total costs acro
29、ss the two firms is minimized by minimizing the two areas and is found by equating the two marginal costs.Any other allocation would result in higher total cost.D.While simple in theory,the situation is more difficult for control authorities because control authorities do not often have access to go
30、od information about firms costs.Plant managers have incentives to overstate costs.Other policy options or pollution control policies must be utilized.Chapter 15 Economics of Pollution Control:An Overview 91 E.Cost-effective pollution control policies 1.Emission standards a.An emission standard is a
31、 legal limit on the amount of the pollutant an individual source is allowed to emit.b.This approach is referred to as command-and-control.c.The difficulty with using emissions standards is determining how the standard should be allocated across sources.The simplest means of allocationallocating an e
32、qual share to each sourceis rarely cost-effective.In the example presented in Figure 15.3,it is not cost-effective.2.Emissions charges a.An emission charge is a per-unit of pollutant fee,collected by the government.b.Charges are economic incentives that reduce pollution because they cost the firm mo
33、ney.c.A profit-maximizing firm will control(abate)pollution whenever the fee is greater than the marginal control cost.d.Each firm will independently reduce emissions until its marginal control cost equals the emission charge.This yields a cost-effective allocation(Figure 15.4).e.A difficulty with t
34、his approach is determining how high the charge should be set in order to ensure that the resulting emission reduction is at the desired level.An iterative or trial-and-error approach can be used to determine the appropriate rate,but changing tax rates frequently is not usually politically feasible.
35、However,as long as the charge is the same for all sources,the reduction automatically minimizes the costs of control.f.Another difficulty is that with a charge system,the total amount of pollution cannot be controlled.If many new sources enter the market,they will still pay the fee,but total emissio
36、ns will rise.g.Charge systems provide incentives for research and development on new and cheaper control technologies because firms will be trying to lower costs and hide those lower costs from the control authority(Figure 15.5).3.Emissions trading a.With an emission trading,all sources are required
37、 to have allowances in order to emit.Each allowance specifies how much the firm is allowed to emit.The allowances are freely transferable.b.The control authority issues the exact number of allowances necessary to achieve the standard.c.Firms with high marginal costs of control will have incentives t
38、o buy allowances from firms with low marginal control costs.Firms with low marginal control costs will have incentives to see if the allowance price is above their marginal control cost.The equilibrium allowance price will be the price at which the marginal control costs are equal for both(or across
39、 all)firms.d.The incentives embedded in this system ensure lowest costs,and the control authority does not need information on control costs.VI.Cost-Effective Policies for Nonuniformly Mixed Surface Pollutants For nonuniformly mixed pollutants,it is the concentration at a sensitive site that is meas
40、ured rather than emissions.A.Ambient standards are legal ceilings placed on the concentration level of specified pollutants.92 Tietenberg/Lewis Environmental and Natural Resource Economics,Eighth Edition B.For a single receptor two-source case,the source closer to the receptor has a larger transfer
41、coefficient.1.The transfer coefficient measures the amount the concentration will rise if source i emits one more unit of pollution.2.The objective is to meet a concentration target at minimum cost.3.The cost-effective allocation is achieved when the marginal costs of concentration reduction are equ
42、al for all sources.A numerical example is presented in Table 15.1.C.Policy approaches to achieve cost effective allocations include ambient charges and ambient permits.1.An efficient ambient charge for each source equals that sources transfer coefficient times the marginal cost of a unit of concentr
43、ation reduction.Sources will pay different charges.Finding the cost-effective charges would be extremely difficult for a control authority.A uniform charge would achieve the desired reduction,but at higher cost.(This can be seen using Table 15.1.)2.An ambient allowance allows the owner to cause conc
44、entration to rise at the receptor by a certain amount.The larger the transfer coefficient,the smaller the amount of emissions will be allowed by the allowance.Sources closer to the receptor must purchase more allowances for a given level of emissions.The sources will pay the same amount for the allo
45、wances,but the amount allowed by each allowance varies by location and thus there may be incentives to trade.D.This model generalizes to a case of multiple receptors.1.For multiple receptors,the cost-effective ambient charge paid by any source is equal to the sum over the number of receptors of the
46、transfer coefficient for source i for receptor j times the monetary fee associated with the jth receptor.2.An ambient allowance system for multiple receptors would require a separate allowance market for each receptor.3.Control costs that depend on location provide incentives for firms to locate fur
47、ther from receptor sites.4.Both ambient charges and ambient allowances are very complex and difficult to implement in practice.VII.Other Policy Dimensions A.The two main pollution-control policy instruments discussed in this chaptercharges and tradable allowancesdiffer in several ways,1.In their abi
48、lity to raise revenue a.Environmental taxes and auctioned allowances raise revenue.b.Free allocation of allowances does not.c.Several studies have illustrated that revenue earned could be substituted for other distortionary taxes.Increasing the present value of net benefits in this manner is called
49、the double dividend.d.Auctioning off allowances,however,has been politically infeasible in most cases to date.Example 15.3 explores this further by looking at the Swedish nitrogen charge that is rebated based on energy production.Chapter 15 Economics of Pollution Control:An Overview 93 2.How new sou
50、rces are treated differs a.With charges,an increase in emitters will raise total levels of pollution.b.With an allowance system,the total level of pollution is fixed.New emitters will increase the demand for permits and raise the allowance price.3.Inflation will affect the price of the allowance and