POLLUTION

1
POLLUTION

• Pollution, like a weed, is simply matter out of
  place.

2
Recall our Earlier Picture of The Economy and
Nature
FIRMS
NATURE AS A SINK FOR WASTES FROM
ECONOMIC ACTIVITY
wastes
NATURE AS A SOURCE OF INPUTS FOR
ECONOMIC ACTIVITY

commodities
labor



HOUSHOLDS
wastes
3
All firms produce goods but some of them
produce bads.

• That is, a good is something we value and want to
  have. That is what firms do for us.
• While a bad is something we do not value and we
  wish we did not have to endure it.

4
The difference between goods and bads is not
always obvious.

• That is, the good aspect is usually immediately
  apparent to us
• While the bad aspects may appear only later

5
Consider the automobile

• When first introduced the good aspects seemed
  obvious
• You only had to feed a car when you used it,
  while horses had to be fed every day
• And of course automobiles did not deposit stuff
  in the road that had to be shoveled away.

6
And of course the stuff coming out of the exhaust
pipe was not imagined, at the time, to be a
problem

• How could we know it was a problem?
• We had never experienced automobile exhaust
  before.
• And when there were few automobiles there was not
  much exhaust.
• So the bads seemed minimal along side of the
  many conveniences offered by automobiles.

7
Factories produce many things that we want, and
for some time, the nature of their discharges
into rivers and lakes was certainly not apparent
to us.Nor did we worry much about what came out
of their smokestacks and drain pipes.

• We saw the good things, and were largely
  oblivious to the by-products of their actions.

8
Consider an industry consisting of factories
making something good but also giving rise to
something bad. Here we see the effects of both a
clean and a dirty technology used by the
firms in this industry.

S
D
Quantity of goods
QC
Clean Technology
QD
Quantity of bad stuff
Dirty Technology
9
That is, for any given level of production by the
factories in this industry there can be lots of
bad stuff produced, or there can be very little
bad stuff produced.

• The difference between lots of bad stuff produced
  and not very much bad stuff produced is,
  predictably, a matter of costs.
• As long as firms can dump their unwanted waste
  products in the nearby river or lake (or into the
  atmosphere) they can save a great deal of money
  that they might otherwise have to spend in order
  to eliminate those unwanted discharges.

10
So the issue here is one of firms being able to
shift costs to others in the form of untreated
pollutants.

• The idea of COST SHIFTING is at the core of what
  economists call EXTERNALITIES.
• We call them externalities because these costs
  are external to the firm.
• Firms must buy their labor needs, their energy
  needs, their raw materials, and the other
  services they require (tax advice, legal
  services, insurance) from other firms and that
  purchase is always mediated by a price.

11
However, as long as there is a river nearby, and
as long as there is no law against putting your
wastes (gunk) in that river, then you have
avoided a serious cost obligation, and in doing
so you have shifted costs to someone else.

• These shifted costs are external to your
  accounting inside the firm
• These shifted costs are external to your own
  calculations of how to do business
• These costs fall on external parties.
• This is why economists call them externalities.

12
The Concept of Pollution DamagesFour Damage
Functions in Monetary Terms


A
B
Absorptive capacity
EMISSIONS
EMISSIONS


C
D
EMISSIONS
EMISSIONS
13
Let us now consider pollution damages in greater
detailhere we show the marginal costs of
emissions
Damage costs in
MD2
MD1
Total damages From MD2 a b Total damages
from MD1 b
a
b
Emissions per year (tons)
E1
14
Why does MD2 lie above MD1?

• MD2 could reflect a more toxic pollutant being
  discharged
• MD2 could reflect more people adversely affected
  by the pollutant

15
The firm (a factory) is able to avoid costs by
disposing of waste products into a river, and
this disposal creates damages (costs) for others.

• Of course the firm could, if it wished, incur
  costs in order to clean up its waste products
• But doing so will cost money
• How might we depict this?

16
We would treat this as a category of abatement
costs

Marginal abatement costs
Reduced Emissions
Current Emissions
17
Let us now put together the marginal damages of
pollution and the marginal abatement cost of
pollution

Marginal damage costs (MDC)
Marginal abatement costs (MAC)
Total remaining damages at E
Cost per unit
Total abatement costs to reach E
No Emissions E
Current Emissions
18
The solution point here is where the marginal
abatement cost (MAC) is brought into equality
with the marginal damage costs (MDC) as we move
to the left (reducing pollution of the
environment).

• At this point MAC MDC, implying that if the
  firm were to spend one more 1 to clean up
  pollution (moving to the left in the figure), the
  benefits of that expenditure in terms of reduced
  environmental damages would be less than the
  necessary costs to reduce those damages. Going
  beyond (to the left of this point) would not make
  economic sense.
• We would say that MAC MDC defines efficient
  level of pollution.

19
Efficiency looked at in another way.

• Notice that at the current level of emissions
  (far to the right) total pollution damages are
  shown by the entire area under the MDC curve.
• Notice that as firms start to undertake internal
  abatement of pollution we move to the left in the
  figure and that at the far left (zero emissions)
  total costs of removing all pollutants are shown
  by the area under the MAC curve.
• One way to regard this dilemma is to ask how far,
  exactly, we should encourage (force) firms to
  move in the interest of reducing pollution?

20
Of course there are plausible reasons to force
them to eliminate all pollution.

• This urge can be defended, perhaps, on grounds of
  moral outrage,
• But it would be difficult to defend this urge on
  economic criteria.
• To see this, notice that reducing pollution
  beyond E (that is, moving to the left of E)
  would entail the spending of money on abatement
  along the MAC curve.
• However notice that to the left of E the
  marginal cost of reducing pollution is in excess
  (lies above) the marginal reduction in pollution.
  In other words, moving to the left of E is to
  spend more on reducing pollution than it is worth
  in terms of pollution damages avoided by that
  reduction.

21
This brings us to the realization that there are
two ways of considering the point E

• As previously E is that point of equality
  between the marginal costs of removing one more
  unit of pollution from the stuff that the firm
  dumps in a nearby river and the reduced damages
  from NOT dumping that unit of pollution in the
  river.
• But notice that E is also the point where the
  total costs of removing pollutants plus the total
  costs of damages from the remaining pollution are
  as small as possible.
• There is no other level of pollution reduction
  for which this can be said.

22
Here it is again. Notice that any movement away
from E violates the two conditions (1) MAC
MDC and (2) total costs of abatement plus
remaining damages be minimized.

Marginal damage costs (MDC)
Marginal abatement costs (MAC)
Total remaining damages at E
Cost per unit
Total abatement costs to reach E
No Emissions E
Current Emissions
23
Consider another way of looking at this figure.

• We can regard the curve MDC as the demand curve
  for improved environmental quality (for reduced
  pollution).
• It is a demand curve because it shows the
  value of additional units of improved
  environmental quality.
• That is, the curve shows the worth (value) of
  less pollution and thus of more environmental
  quality.
• In essence, we are buying more environmental
  quality and the MDC shows us the willingness to
  pay for that improved condition. It is our
  willingness to pay because it shows the value
  of reduced pollution as we move to the left.

24
If we accept the idea that the MDC is analogous
to a demand curve for improved environmental
quality, then the supply side of this issue
focuses on the costs of providing more
environmental quality. The cost of increased
environmental quality is precisely depicted by
the MAC function.

• That is, firms can supply more environmental
  quality (more pollution abatement) according to
  the cost schedule depicted by MAC
• In familiar terms, the efficient level of
  abatement is where the demand for improved
  environmental quality (MDC) equals the supply of
  improved environmental quality (MAC). That is,
  MDC MAC.

25
Here it is again.

Marginal damage costs (MDC)
Marginal abatement costs (MAC)
Total remaining damages at E
Cost per unit
Total abatement costs to reach E
No Emissions E
Current Emissions