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Environmental Economics

Environmental Economics. Cost of Reducing Pollution. Total abatement Costs =Area A. $. MAC a. C a. A. P a. Greater Abatement. Pollution Reduction. Command and control. Legislate emission levels All firms required to reduce pollution to specific levels e f is maximum pollution

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Environmental Economics

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  1. Environmental Economics

  2. Cost of Reducing Pollution Total abatement Costs =Area A $ MACa Ca A Pa Greater Abatement Pollution Reduction

  3. Command and control • Legislate emission levels • All firms required to reduce pollution to specific levels • ef is maximum pollution • Forced to cut in half (0.5ef) • What are costs of abatement?

  4. Firm 1 Firm 2 $ (High cost firm) $ MAC2 C2 (Low cost firm) MAC1 C1 (0,ef) (ef,0) .5ef Total abatement for firm 2 Total abatement for firm 1 Abatement

  5. Firm 2 Firm 1 Total abatement Costs = a+d+f+b+g $ $ C2 d Ce f C1 a b g .5ef Abatement

  6. Taxes • Instead of command and control, why not tax emission • Requires continuous monitoring • In this case, Ce is per unit tax • Two characteristics • Equal cost at the margin for both firms • Will show it holds total pollution constant to command and control levels

  7. Firm 2 Firm 1 Total abatement Costs = a+d+f+b+g $ $ C2 d Ce f C1 a b g .5ef Abatement

  8. Firm 2 Firm 1 Total abatement Costs = a+b+g $ $ Total cost savings=d+f C2 d Ce Ce f C1 a b g .5ef e1 Taxes paid, Firm 2 Taxes paid, Firm 1 Abatement

  9. Firm 2 Firm 1 $ $ C2 d Ce Ce f C1 a b g .5ef Abatement

  10. Firm 2 Firm 1 $ $ C2 d Ce Ce f C1 a b g e1 .5ef Abatement

  11. Cap and trade • Start with command and control levels • Receive permit to pollute 0.5ef • must abate 0.5ef • However, you can increase pollution levels only if you purchase the right to pollute from another manufacturer • Who would sell their right to pollute? Who would purchase?

  12. Firm 2 Firm 1 $ $ C2 d Ce Ce f C1 a b g .5ef e1 Abatement

  13. Firm 2 Firm 1 $ $ C2 d Ce Ce f C1 a b g e1 .5ef Abatement

  14. Firm 2 • Willing to pay area d+f+b for the right to pollute more • Firm 1 • Needs b to increase pollution • Trade will take place • Notice that both firms are better off • Costs of a abatement have fallen by d+f

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