Chapter 17 – The Economic of Environmental Protection
The socially optimal level of output is at the quantity for which all marginal costs, private
plus external, equal the marginal benefit to society.
o Figure 17-1 pg. 418
o Figure 17-2 pg. 419
Internalizing the externality: a process that results in a producer of consumer taking
account of a previously external effect
Zero environmental damage is generally not allocatively efficient
Pollution is being abated efficiently when the marginal cost of pollution abatement is
the same for all firms
Direct pollution controls are usually inefficient because they do not minimize the total
cost of a given amount of pollution abatement.
Monitoring and enforcement of direct pollution controls are costly, and this costliness
reduces the effectiveness of the controls.
Emissions taxes can internalize pollution externalities so that profit-maximizing firms
will produce the allocatively efficient amount of pollution abatement.
A disadvantage with emission taxes is that information necessary to determine the
optimal tax rate is often unavailable
Tradable pollution permits: rights to emit specific amounts of specified pollutants that
private firms may buy and sell among themselves. The total quantity of permits is set by
With tradable pollution permits, profit-maximizing firms will reduce pollution until their
marginal abatement costs equal the price of pollution permits. The costs of a g