The Economic Theory of Pollution Control

1. The Economic Theory of Pollution Control The Optimal Level of Pollution

2. Minimization of Waste Disposal Cost • From a purely economic perspective, the management of environmental quality or pollution control is easily understood if the problem is viewed as minimizingtotal waste disposal costs. • Minimize: TWDC = TPCC + TPDC

3. continue... • In minimizing this cost, the underlying economic logic is this. A dollar’s worth of investment (expenditure) on pollution control technology will make sense if, and only if, society is expected to be compensated by the benefits to be realized from the avoidance of environmental damage that worth’s more than a dollar.

4. Pollution Control (Abatement) Costs and Their Properties • Pollutioncontrolcosts represent direct monetary expenditures by society for the purpose of procuring resources to improve environmental quality or to control pollution. Examples are: • Sewage treatment facilities, smoke stacks, soundproof walls and catalytic converters on passengers cars.

5. continue... • In general, we would expect the marginal pollution control cost to increase with increased environmental quality or cleanup activities. • This is because incrementally higher levels of environmental quality require investments in technologies that are increasingly costly.

7. continue... • Exogenous factors that determines the position of any marginal control cost curve are: • Technology of pollution control • Input switching • residual recycling • production technology

8. continue... • Since pollution control costs are explicit or out-of-pocket expenditures, it is often assumed that no apparent market distortion occurs as a result of a third party effect--externality.

9. Pollution Damage Costs and their Salient Properties • Pollutiondamagecosts represent the total monetary value of all the various damages resulting from the discharge of untreated waste into the environment.

10. continue... • In general, pollution damage costs are identified in terms of the losses of or damage to plants and animals and their habitats; aesthetic impairments; rapid deterioration to physical infrastructures and assets; and various harmful effects on human health and mortality.

11. continue... • It is assumed that the marginal damage cost is an increasing function of pollution emissions. • In other words, the damage caused by a unit of pollution increases progressively as the amount of pollution (untreated waste) emitted increases. (see Figure 4.2 next page)

13. continue... • The damage cost curve measures the social cost of the damage to the environment in monetary terms, resulting form each additional unit of waste emission. • We assume to this despite the knowledge that some aspects of pollution damage are simply beyond the realm of economic quantification.

14. continue... • Damage cost is considered to be an increasing function of pollution emissions. In other words, the damage caused by a unit of pollution increases progressively as the amount of pollution (untreated waste) emitted increases. • This is, of course, in accord with the ecological principle discussed in Chapter 2 a cumulative (nonlinear) effect of pollution on the environment.

15. continue... • Exogenous factors affecting the marginal damage cost: • changes in people’s preference for environmental quality • changes in population • discovery of new treatment(s) to damage caused by environmental pollution • a change in the nature of the assimilative capacity of the environment

16. continue... • The marginal pollution damage cost curve actually represents what people are willing to pay to avoid damage or the demand function of environmental quality. • Pollution damage cost are externalities--costs incurred by members of society after the pollution damages have already occurred.

17. Changes in Preference and Technolgoy • A preference for a higher level of environmental quality would lead to a lower tolerance for pollution or a higher level of environmental quality. • However, the higher environmental quality would be realized at some additional cost.

18. continue... • Effects of Technology: • Case 1 : Improvement in waste treatment technology would allow society to reduce its level of pollution or improve its environmental quality. • Moreover, the improvement would be accomplished without an additional increase in the total disposal cost.

19. continue... • Case 2: A breakthrough in the treatment of a cancer caused by exposure to a certain pollutant. • In this case improvement in technology would lead to an increase, rather than, a decrease, in the level of pollution or deterioration of environmental quality.

20. continue... • Clearly, the above two cases illustrates, a technological improvement that causes a shift in either the MCC or the MDC leads to a reduction in total disposal cost. A saving in disposal cost is, then, the unambiguous result of improved technology. • However, the effect of technological improvement on the level of pollution or environmental quality is not as straightforward.

21. The Optimal Level of Pollution: An Ecological Appraisal • Cases where economic and ecological “optimum” pollution may differ: • Case 1: The case of persistent pollutants, such as DDT

22. continue.. • Case 2: The economic optimum is achieved by sole consideration of human preference (willingness to pay) of environmental quality. • Case 3: The standard economic approach to pollution control may put more emphasis on pollution cleanup than pollution prevention.

23. continue... • Case 3: The optimum pollution does not adequately safeguard the interests of future generations and the ecosystems as a whole. A case in point being global warming--a situation where irreversible ecological changes and the risk of major adverse surprise (uncertainty) over a long time horizon are evident. • The precautionary Principle (see next page)

24. continue... • The Precautionary Principle--holds that society should take action against certain practices when there is potential for irreversible consequences or for severe limits on the options for future generations-even when there is as yet no incontrovertible scientific proof that serious consequences will ensue.