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Chapter 17

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ECON 110
Ian James Cromb

Chapter 17: The Economics of Environmental Protection The Economic Rational for Regulating Pollution Pollution as an Externality  Polluting firms that are profit maximizers do not regard a clean environment as a scare resource and therefore do not consider the full costs of using the resource  When there are negative externalities, social marginal cost exceed private marginal cost because production generates costs for society that are not faced by the producer o By producing where price = private marginal cost, firms are producing too much  The social benefit of consuming the last unit is less than the social cost – reducing output by one unit would increase allocative efficiency  Internalizing the Externality: Producer taking account of a previously external effect o At the optimal level of output, consumer prices would jus cover the social marginal cost of production The Optimal Amount of Pollution Abatement  The allocatively efficient output still has some pollution being generated o This is because it is impossible to produce p/s without any environmental damage  The optimal amount of pollution abatement occurs where the marginal cost of reducing pollution is just equal to the marginal benefit from doing so  In trying to reach this point there are three problems o The private sector will not do this by themselves – the gov’t must intervene o Optimal level is not easily known because above curves are not easily observable o The available techniques for regulating pollution are imperfect Pollution Control Policies Direct Controls (Command-and-Control Policies)  The form of environmental regulation that is used most often in Canada and the US o Ex. Emission control standards that must be met by all new cars  Often require that specific techniques be used to reduce pollution  Another form of direct control is the simple prohibition of certain polluting behaviours o Ex. You can’t burn leaves, wood, and other trash Problems with Direct Controls  An important problem is the cost associated with direct controls o Direct controls are not productively efficient because the total cost of achieving a given amount of pollution abatement is not minimized o And the cost of monitoring and enforcing these controls are substantial  Pollution is only being abated efficiently when the marginal cost of pollution abatement is the same for all firms – however, under direct controls this is not the case Emission Taxes  Levying a tax on emissions at the source  The advantage is that it internalizes the pollution externality so that decentralized decisions can lead to allocatively efficient outcomes  Since firms pay $t for every unit of pollution produced, they will save $t for every one they don’t produce
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