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Chapter 17

ECO100Y1 Chapter 17 Notes

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University of Toronto St. George
Robert Gazzale

ECO100Y1 Textbook Notes Chapter 17 17.1 The Economic Rationale for Regulating Pollution  Pollution is a negative externality (i.e. 2O released from factories/cars/trucks etc.).  Polluting firms who are profit maximizers do not regard a clean environment as a scarce resource (fail to consider the full costs of using this resource when producing their product).  When there are negative externalities, social marginal cost exceeds private marginal cost because the act of production generates costs for society that are not faced by the producer. MC S MC + PEC = Marginal External Cost MC P  By producing where MC = P, the firm ignores the social cost and thus the MB (Sarket price) < MC . S  Internalizing the externality: a process that results in a producer or consumer taking account of a previously external effect.  The socially optimal level of output is at the quantity for which all marginal costs, private plus external, equal the marginal benefit to society.  MEC is generally hard to calculate (i.e. pollution damage is often widespread over hundreds of thousands of km and can affect millions of people.  It is impossible to produce goods/services without generating some environmental damage. o The problem is to determine how much environmental damage to allow or how much pollution abatement (reduction) to implement.  Zero environmental damage is generally not allocatively efficient.  The optimal amount of pollution abatement occurs where the MC of reducing pollution is just equal to the MB from doing so o The socially optimal amount of pollution abatement implies a positive amount of pollution. o Measured on a graph:  X-axis: Pollution abatement (%)  Y-axis: Dollars per Unit  Marginal cost of abating pollution is often small at low levels of abatement but rises steeply after some point.  Marginal benefit curve slopes downward since the added benefit of reducing pollution by one unit will continually decrease (i.e. a bit of cleaning in a very dirty environment will have a high benefit but a bit of cleaning in a very clean environment will have little benefit).  Pollution-control authorities face three problems when trying to obtain the optimal amount of pollution abatement: o The private sector will not by itself create a market in pollution control (government must intervene). o The MB and MC curves are not usually observable (optimal level will be hard to estimate). o The available techniques for regulating pollution are themselves imperfect. 17.2 Pollution-Control Policies  There are three types of policies designed to bring about the optimal level of pollution abatement: o Direct controls o Emission taxes o Tradable pollution permits  Direct Controls (command-and-control) o Used most often in Canada and the U.S. o Can include:  Requiring certain techniques to be used to reduce pollution.  Standards to be followed (maximum amounts of pollution allowed).  Prohibition of certain polluting behaviours. o Examples:  Automobile emissions  New cars must all meet the standards set out by the government.  Emissions/km must be less than specified amounts.  “Scrubbers”  Devices used in coal-fired electric plants that reduce sulphur dioxide emissions.  Leaded gasoline  The government has banned leaded gasoline (gradually phased out). o Problems:  Direct pollution controls are not productively efficient because the total cost of achieving a given amount of pollution abatement is not maximized.  Pollution is being abated efficiently when the MC 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.  I.e. different firms may have different costs associated with reducing the same amount of pollution.  Monitoring and enforcement of direct pollution controls are costly, and this costliness reduces the effectiveness of the controls.  If the chances of being caught and the penalties are small, the direct controls may have little effect.  Some direct controls have undesirable effects.  I.e. the required average level of fuel efficiency that was required in the US. o The mere existenc
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