Upcoming in Class

1. Upcoming in Class Homework #3 Due Today Quiz #2 Next Wednesday Sept. 26th Writing Assignment Due Oct. 24th

2. Homework #3 • Assume the marginal cost of controlling a pollutant is constant, i.e., it does not vary with the level of output, and the marginal damage cost associated with this same pollutant increases at a constant rate. • A) Illustrate this situation graphically and identify the cost-minimizing level of the pollutant.

3. Question 1 • B) Now assume that as a result of a change in market conditions, the cost of one of the inputs (which accounts for 25 percent of marginal abatement costs) to pollution control doubles, ceteris paribus. Graphically illustrate the effect of this change on the efficient quantity of the pollutant. • C) Does your conclusion in part b) make economic sense? Why or why not? • D)Identify the area in your graph for part b) that represents the change in total pollution costs attributable to the increase in the cost of the input to pollution control.

4. Question 2 • Based on Horizontal and Vertical Zonal Characteristics, how would you classify the following pollutants (ie. Local vs. Regional, Surface vs. Global) • BP Oil Spill in the Gulf of Mexico  • Cigarette Buds outside Stevenson Hall • Cigarette Smoke outside of Pub II  • CO2 Emissions in the World • Polychlorinated Biphenyls (PCBs) in Lake Michigan by the Outboard Marine Corp.

5. Question 3 • . From the article “EPA’s Winding Road” handed out in class, classify the following programs as cap & trade, emissions quota, or emissions charges, and identify the pollutant targeted. • Acid Rain Program •  NOX SIP Call •  CAIR/CATR/CSAPR •  RGGI •  Utility MACT Rule •  Cooling Water Intake Rule

6. Question 4 A chemical factory is situated next to a farm. Airborne emissions from the chemical factory damage crops on the farm. The marginal benefits of emissions to the factory and the marginal costs of damage to the farmer are as follows MB= 200 – 0.3 Q and MC=100+0.1Q From an economic viewpoint, what is the best solution to this environmental conflict of interest? How might this solution be achieved?

7. Pollution Classification Point pollution – pollution emitted from an identifiable source, such as smokestacks or waste pipe Non-point – pollution difficult to identify as originating from a particular source, such as groundwater contamination from agricultural chemicals used over a wide area

8. Marginal Costs ofPollution Damage and Control

9. Pollution Standards • Set standard based on other criteria • Safe for human use or consumption • Safe for human recreation • Ecological health • Regulate all polluters to meet the same standard • Cost-Effectiveness – choosing a policy that minimizes the cost of meeting a set standard.

10. Q* = socially efficient level • Finding Q* is difficult • Damage Costs are difficult to estimate • Firms have incentive to state control costs higher than they are • Examples, • Auto-industry fought against controlling car emissions • Electricity industry estimated the cost of controlling SOX as much higher than was true

11. Emission Charges • An emission charge is a per-unit of pollutant fee, collected by the government. • Each firm will independently reduce emissions until its marginal control cost equals the emission charge. • Advantage – • Market based, economic incentive • Firm more efficient at controlling pollution have a competitive advantage • Firm reaches cost-effective level of control • Disadvantage – • determining how high the charge should be set in order to ensure that the resulting emission reduction is at the desired level.

12. A Per-Unit Chargefor Pollution Emissions

13. Practice Problem • Two power plants are currently emitting 8,000 tons of pollution each. Control costs for the two plants are • MCC(1)= 2Q • MCC(2)= 3Q • Q represents the quantity of pollution reduction.

14. Calculate the control cost for the firm, total control cost, government revenues, and total pollution reduction for the following two scenarios. Regulation requiring, each plant to control 5,000 tons A tax of $12,000 per ton

15. A New Technology Suppose a new technology is discovered that can control pollution at a lower cost. Both firms adopt this technology. MCC=1.5 Q What is the effect of the tax now on MC, the efficient level of Control, Total Control Cost, and Government Revenue?