B.  Pollution:  Analysis and Policy

1.  Optimal level of pollution

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2.  Policies for pollution control

a.  Emissions standards

• Mandate firms or industries to meet a specific pollution level or pollution reduction

• Set by the Environmental Protection Agency (EPA) or other agencies

Ex. - Tailpipe emissions, automobile gas mileage

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(1)  Advantage

(a)  Can specify a definite desired result

• Particularly important if substance poses a hazard to public health

• Can involving banning a substance

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(2)  Disadvantages

(a)  Inflexible

• Okay when firms or products are similar

• Problem if there are differences

• Might be too difficult for older plants to meet, too lax for modern facilities

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(b)  Not cost effective

• Cheaper for plants with lower marginal cost to reduce more

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(c)  No incentive to reduce pollution beyond standard

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b.  Technology-based approaches

• Require firms to implement specific equipment or actions

Ex. - Catalytic converters

• Based available control technology (BACT) - all firms must use a control technology deemed most effective

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(1)  Advantages

(a)  Enforcement and monitoring costs are relatively low

(b)  Standardization of equipment

• Can reduce costs due to economies of scales and learning curve

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(2)  Disadvantages

(a)  Not cost-effective

• No flexibility to pursue a wide range of options

• Implementation costs will vary among firms

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(b)  Little incentive for innovation

• Technology that reduces pollution but increases costs won't be developed because it would have to be adopted

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c.  Pigouvian (pollution) taxes

• Tax per unit of pollution

• Try to internalize external costs

• Market-based approach

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(1)  Advantage

• Can achieve economic efficiency

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(2)  Disadvantage

• Difficult to determine total amount of pollution reduction as MCR varies between firms

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d.  Tradeable pollution permits

• Firms can buy and sell permits allowing certain levels of pollution

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(1)  Implementation

(a)  Issue permits equal to desired target level of pollution

(b) Allocate permits to existing firms or sell at auction

(c)  Fully tradeable thereafter

(d)  Private groups can buy permits and retire them if they want to reduce pollution below target level

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(2)  Advantages

(a)  Can set a definite limit on pollution levels

(b)  Use market to achieve efficient result

(c)  Generates revenue to government if permits are auctioned

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(3)  Disadvantages

(a)  Can be difficult to understand

(b)  New technology => reduces cost of permits => allow older plants to increase pollution

(c)  Transfer from consumers to companies if permits are issued for free

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3.  The scale of pollution impacts

a.   Nonlinear or threshold effects

• Pollution damage can increase significantly if pollution exceeds a threshold

• Ex. - Lead

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• Use policy to keep pollutant below the threshold

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b.  Local vs. regional pollutants

• Local pollutant - damage occurs close to where pollutant is emitted

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• Regional pollutant - damage occurs over a wide area

Ex. - Sulfur oxides => acid rain

- Market based solutions work better when dealing with regional pollutants

- Overall level is important, less concerned with which sources emit pollution

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• Uniformly mixed pollutants - emitted by many sources and relatively constant concentrations across a region or the world

Ex. - Greenhouse gases

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• Nonuniformly mixed pollutants - different concentrations at different locations

Ex. - Particulate matter

- May lead to hotspots - locally high levels of pollution

- Market based solutions work better when dealing with uniformly mixed pollutants

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c.  Cumulative and global pollutants

• Some pollution problems last a long time

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• Cumulative or stock pollutant - persists in the environment for long time periods

- Does not dissipate and can accumulate over time

Ex. - DDT, polychlorinated biphenyls (PCBs), chlorofluorocarbons (CFCs)

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• Flow pollutant - short-term impact and then dissipates or is absorbed harmlessly into the environment

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• Global pollutant - has global impact

Ex. - Carbon dioxide

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• Requires urgent action

• May take a long time to deal with problem

• Possible to reach a point of irreversible damage

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4.  Assessing pollution control policies

a.  Impact of technological change

• Cost of pollution control can be reduced with technological progress

- How will changing control costs affect the policies?

- What incentives do create for the development of improved pollution control technologies?

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b.  Structuring policies

(1)  Allocating permits in a tradeable permit system

(a)  Issue permits at no cost, usually based on historic emissions

• Missed opportunity for revenue

• Historically inefficient facilities rewarded

• Newer, more modern firms would need to purchase permits from existing firms

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(b)  Permit auction - sell permits to highest bidder

• Revenue raised for the government

• Newer firms not at a disadvantage

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(2)  Grandfathering

• Exempt existing facilities from having to comply with new environmental standards

• Avoid high marginal cost to reduce pollution

• Little incentive to upgrade facilities

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(3)  Upstream policy

• Apply policy as near as possible to the point of natural resource extraction

• Minimize administrative complexity

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(4)  Monitoring and enforcement

• Monitoring done with electronic equipment and site visits

• Punishment must be sufficient to deter violations

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c.  Comparing policies

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5.  Policies in practice

a.  Air pollution

• Clean Air Act (1970, revised in 1990)

• Critical air pollutants - particulate matter, ground-level ozone, carbon monoxide, sulfur oxides, nitrogen oxides, lead

• Toxic air pollutants - small quantity but dangerous health effects

Ex. - Mercury, arsenic, vinyl chloride

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b.  Water pollution

• Clean Water Act (1972, ammended in 1977)

• Focus on point-source pollution - pollutio emitted from an identifiable source

Ex. - Drainpipe

• Nonpoint-source pollution - difficult to identify source, difficult to control

Ex. - Agricultural runoff

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c.  Other pollution

(1)  Resource Conservation and Recovery Act (1976)

• Regulates disposal of hazardous waste

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(2)  Toxic Substances Control Act (1976)

• Regulates chemicals

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