Optimal Level of Pollution PDF

1  Main Points ◼ Introduction ◼ Zero emissions Level ◼ Marginal damage costs ◼ Marginal abatement costs ◼ Optimal level of pollution ◼ Social costs when pollution level is greater/ less than Optimal ◼ Least cost allocation of abatement between two sources (firms) ◼ Change...

1  Main Points ◼ Introduction ◼ Zero emissions Level ◼ Marginal damage costs ◼ Marginal abatement costs ◼ Optimal level of pollution ◼ Social costs when pollution level is greater/ less than Optimal ◼ Least cost allocation of abatement between two sources (firms) ◼ Changes in preferences and technology and their effects on the optimal level of pollution ◼ Problem 2  Introduction ◼ We all want to protect the purity and vitality of our air and water, and the natural landscape. ◼ However, despite our desire to do so, as long as we are engaged in transforming material inputs (land, labor, capital, and raw materials) into economic goods, we cannot avoid creating residuals. ◼ These residuals of the economic process are commonly referred to as pollution. ◼ Pollution is an inevitable by product of economic activities. 3  Introduction ◼ Economic consideration of waste (pollution) becomes relevant when the amount of waste disposed exceeds the assimilative capacity of the environment. ◼ When this critical threshold is exceeded, what becomes immediately apparent is the trade-off between environmental quality and pollution. ◼ As further pollution beyond this threshold could occur only at the cost of reduced environmental quality. ◼ Thus, pollution occurs at a cost. Then, there is a rationale for pollution control strategy or environmental management. 4  Introduction ◼ The economic problem will be to determine the volume of waste that is consistent with the socially optimal level of environmental quality, i.e. the optimal level of pollution. 5  Zero Level of waste emissions Zero pollution is not socially possible/desirable because: ◼ The elimination of pollution will have opportunity costs (producing nothing so this will not benefit the society) ◼ Any consumption or production activity must produce waste. But zero pollution can exist in some cases ( ban on DDT in USA) 6 Zero Level of waste emissions ◼ At every level of pollution the MDC is greater than the MCC, and the ban on any substance generating such waste is economically justified 7  Choosing the Correct Level of Environmental Quality ◼ To manage environmental quality, total disposal costs have to be minimized. ◼ The total disposal costs are composed of two parts: total pollution control costs and total pollution damage costs. Total waste disposal costs = Total pollution control (abatement) cost + total pollution damage cost. The first is the cost of reducing pollution. The second is the cost of the damage that pollution creates by degrading the physical, natural, and social environment. 8  The Marginal Damage Function ◼ The marginal damage function represents the cost of damages that pollution generates by degrading the environment. ◼ Pollution damage costs are identifiable in terms of the losses of or damage to plants and animals and their habitats; rapid deterioration of physical infrastructures and assets; and various harmful effects on human health and mortality. ◼ The marginal damage cost represents the demand curve for environmental quality. ◼ The total damages generated by a particular level of pollution is represented by the area under the marginal damage function. 9 Marginal Damage Function 10 Marginal Damage Function ▪ A basic assumption in the construction of this curve is that damage cost is an increasing function of pollution emissions. ▪ The damage caused by a unit of pollution increases as the amount of pollution (untreated waste) emitted increases. ▪ The marginal damage cost increases from $125 (the cost of the tenth unit of waste) to $500 (the cost of the fifteenth unit of waste) 11  Marginal Abatement (control) Cost Function ◼ Abatement Costs are those costs associated with reducing pollution to a lower level so that there are fewer damages. ◼ Abatement costs include: Labor Capital Energy needed to lessen emissions ◼ Expenditures on sewage treatment facilities, smokestacks, soundproof walls, and catalytic converters on passenger cars are just a few examples of pollution control costs. 12  Marginal Abatement Cost Function ◼ Thus, the marginal control cost should represent the supply curve for environmental quality. ◼ This indicates that pollution control (cleanup) cost increases as higher levels of environmental quality are attained (produced). 13 Marginal Abatement Cost Function ◼ The marginal abatement cost function represents the costs of reducing pollution by one more unit. ◼ In the following figure, Eu represents the level of pollution that would be generated in absence of any government intervention. ◼ As pollution is reduced below Eu, the marginal abatement cost increases. 14 Marginal Abatement Cost Function ▪ The benchmark or total number of units of waste that is being considered for treatment is 20. ▪ This is evident since the marginal cost of the twentieth unit of waste (i.e. no waste treatment) is seen to be zero. ▪ The marginal pollution control cost increases at an increasing rate as a higher level of cleanup or environmental quality (a movement towards the origin) is desired. ▪ The marginal cost of controlling or treating the fifth unit of waste is seen to be $50. However, the marginal cost increases to $200 to treat the fifteenth unit of waste 15  Marginal Abatement Cost Function ◼ Marginal abatement costs rise as cheaper options for reducing pollution are exhausted and more expensive steps must be taken. ◼ A high vertical intercept indicates that the cost of eliminating the last few units of pollutants would be extremely high. 16  The Optimal Level of Pollution ◼ Optimal level of pollution minimizes the total disposal costs of pollution (the sum of total abatement costs and total damages costs). ◼ This level occurs at the point where marginal abatement costs are equal to marginal damages. 17 The Optimal Level of Pollution 18 Social Costs When Pollution Level is Greater than Optimal ◼ The optimal level of pollution is E1. ◼ The actual level of pollution is E2. ◼ This represents marginal damages greater than marginal abatement costs for the range of pollution emissions between E1 and E2. Society is better off eliminating that unit of pollution. 19 Social Costs When Pollution Level is Less Than the Optimal ◼ The optimal level of pollution is E1. ◼ The actual level of pollution is E3. ◼ This represents marginal abatement costs greater than marginal damage for the range of pollution emissions between E1 and E3. It doesn’t make sense to reduce pollution. 20  Equimarginal Principle ◼ If there are multiple sources of a particular type of a pollutant with differing MACs, To reduce aggregate emissions at the least possible costs, then emissions from various sources must be reduced according to equimarginal principle. 21  Equimarginal Principle ◼ Suppose it is optimal to control (abate) 100 units of pollution that are generated by two firms ◼ How much control should each firm undertake to minimize total costs? ◼ Cost of control is at a minimum when the marginal abatement costs are equal. 22  Least cost allocation of abatement between two sources (firms) Equimarginal principle damages, costs, $ MAC1 MAC2 a b 0 10 20 30 40 50 60 70 80 90 100 emissions firm 1 100 90 80 70 60 50 40 30 20 10 0 emissions firm 2 23  Optimal pollution (abatement) levels and costs of control ◼ In this example firm 1 should control 40 units and firm 2 should control 60 to achieve least cost of control. ◼ This solution takes into account the fact that different firms have different costs of control. ◼ Can consider both goals on one graph ◼ Can see both that optimal abatement is 100 and efficient (least cost) allocation is 40, 60 24  Changes in preferences and technology and their effects on the optimal level of pollution ◼ First: Change in preferences ◼ Second : Change in technology 25  First: Changes in Preferences ◼ A new environmental awareness campaign causes people’s demand for higher environmental quality to increase. ◼ The effect of this would be to shift the MDC curve to the left. ◼ The shift of the marginal damage cost curve from MDC0 to MDC1 ◼ This change in the marginal damage cost will alter the position of optimal level of pollution from Wk to Wj ◼ The higher environmental quality was realized at some cost; the total disposal cost is higher at the new equilibrium (area OVW* instead of ORW*). 26 Changes in Preferences 27  Second: Changes in Technology (related to emissions) ◼ Suppose there is a technological breakthrough in the control or treatment of a specific type of waste (cost savings in waste treatment). ◼ Since this implies a cost saving in waste treatment, the MCC curve will shift downward to the left. ◼ A shift in the marginal control cost curve from MCC0 to MCC1 ◼ The shift will have the effect of reducing the level of pollution from its initial level Wk to Wj ◼ When the level of pollution is Wk, the total waste disposal cost is shown by area OSW*. ◼ However, with the new level of pollution,Wj, the total waste disposal cost is reduced to OTW*. ◼ There is not only a decline in pollution, but also a reduction in waste disposal costs. 28 Changes in Technology (related to emissions) 29  Changes in Technology (related to treatment of diseases) ◼ If we assume that there is a technological breakthrough in the treatment of a cancer caused by exposure to a certain pollutant ◼ This is to shift the marginal damage cost downward and to the right. ◼ This is shown by a shift in the marginal damage cost curve from MDC0 to MDC1. ◼ The new optimal level of pollution,Wi, will exceed the level of pollution present before the change in technology occurred,Wk. ◼ Then, where improvement in technology would lead to an increase, rather than a decrease, in the level of pollution or a deterioration of environmental quality. However, even under this condition, improvement in technology would lead to a reduction in total waste disposal costs.. ◼ The total disposal cost was area OFW* before the technological breakthrough in cancer treatment occurred, but this cost is now reduced to area OGW*. 30 Changes in Technology (related to treatment of diseases) 31 Problem ◼ Assume that the society faces the following MAC and MDC functions: MAC= 60-4E MDC=2E Then find, i. Socially efficient level of emissions. ii. MAC &MDC at socially efficient level of emissions. 32