Command and Control Approach to Pollution Abatement

Pollution abatement model

Instead of analyzing production of a good producing pollution, we are analyzing production of pollution abatement Abatement, A, is usually measured in percentage terms

0% abatement = no pollution control 100% abatement = zero pollution

Pollution abatement model

Benefits of pollution abatement = reduction in external costs, i.e. damage reduction, MSB = marginal social benefits Costs of pollution abatement:

Costs of installing and using abatement technologies, MAC = marginal abatement cost Costs of enforcing regulations, MCE = marginal enforcement costs Marginal social cost of abatement, MSC = MAC + MEC

Pollution abatement model example

MSB = 360-4.5*A MSC = 2.7*A A is the percent of pollution abated

A 0 10 20 30 40 50 60 70 80 90 100

MSB 360 315 270 225 180 135 90 45 0

MSC 0 27 54 81 108 135 162 189 216 243 270

Pollution abatement model example

Analysis of abatement
400 350 MSB 300 MSC 250 200 150 100 50 0 0 10 20 30 40 50 60 70 80 90 100 Percent pollution abated

Pollution abatement model example

Q. What is the allocatively efficient quantity of pollution abatement? A. Quantity at which MSB = MSC of abatement.

In this example, the quantity would be 50%, the cost for the last unit of abatement would be $135.

Pollution abatement model variations

The pollution abatement model will be refined to consider the following:

Change in abatement costs Inefficiency of standard setting Two regions with differing MSB Two pollution sources with differing MSC

Pollution abatement model example lower abatement costs

MSB = 360-4.5*A MSC = 2.7*A MSC = 1.5*A A is the percent of pollution abated

A 0 10 20 30 40 50 60 70 80 90 100

MSB 360 315 270 225 180 135 90 45 0

MSC 0 27 54 81 108 135 162 189 216 243 270

MSC' 0 15 30 45 60 75 90 105 120 135 150

Pollution abatement model example lower abatement costs

Analysis of abatement
400 350 MSB 300 MSC 250 200 MSC' 150 100 50 0 0 10 20 30 40 50 60 70 80 90 100 Percent pollution abated

Pollution abatement model example lower abatement costs

Q. What is the allocatively efficient quantity of abatement when abatement costs decrease? A. The newly efficient quantity is 60% and the cost of the last unit of abatement is $90.

Pollution abatement model example are standards efficient?

What is the net social loss if a government regulatory authority sets the level of abatement at 30%?

Pollution abatement model example are standards efficient?

Analysis of abatement
400 350 MSB 300 MSC 250 Deadweight loss from inefficient standard 200 150 100 50 0 0 10 20 30 40 50 60 70 80 90 100 Percent pollution abated

Pollution abatement model two regions with differing MSB

Is it reasonable to assume that the benefits of abatement are identical everywhere in the US?

Pollution abatement model two regions with differing MSB

In this example there are two regions, each with its own MSB function:

MSB region 1 = 360-4*A MSB region 2 = 134-4*A

What is the efficient level of A in each region?

Region 1 A* = 50% Region 2 A* = 20%

A 0 10 20 30 40 50 60 70 80 90 100

MSB1 360 315 270 225 180 135 90 45 0

MSB2 134 94 54 14

MSC 0 27 54 81 108 135 162 189 216 243 270

Pollution abatement model two regions with differing MSB

What are the efficiency consequences if a uniform standard of 30% reduction was set for each region?

Pollution abatement model two regions with differing MSB

Analysis of abatement 400 350
MSB1

300
MSC

250 200 150

MSB2

100 50 0 0 10 20 30 40 50 60 70 80 90 100 Percent pollution abated

Pollution abatement model two regions with differing MSB

What are the efficiency consequences if a uniform standard of 30% reduction was set for each region? Region 1 has too little abatement since MSB>MSC for additional abatement Region 2 has too much abatement since MSB<MSC at 30% Standards that are uniform across regions will likely be inefficient.

Pollution abatement model two pollution sources with differing MSC

If the cost of abatement among sources differs, is it efficient to have each abate by the same amount? Lets reinterpret the example of lowering MSC over time, so that each cost curve represents two different sources during the same period of time

Pollution abatement model example two sources with differing abatement costs
Analysis of abatement
400 350 MSB 300 MSC firm 1 250 200 MSC firm 2 150 100 50 0 0 10 20 30 40 50 60 70 80 90 100 Percent pollution abated

Pollution abatement model example two sources with differing abatement costs

What is the efficient quantity of abatement at each source?

For firm 1, A* = 50% For firm 2, A* = 60%

The firm with the lower abatement costs should abate more! A uniform standard among sources therefore would be inefficient.

Pollution abatement model example

cost effective allocation of a standard among sources with differing abatement costs no consideration of benefits in standard setting

Pollution abatement model example

MAC 1 = 3*A MAC 2 = 60+1.5*A

Units of A MSC 1 0 0 5 15 10 30 15 45 20 60 25 75 30 90 35 105 40 120 45 135 50 150

MSC2 60 67.5 75 82.5 90 97.5 105 112.5 120 127.5 135

Pollution abatement model example

If standard is set at a total of 50 units and this was split between the two firms, what is the MAC at each?

Units of A MSC 1 0 0 5 15 10 30 15 45 20 60 25 75 30 90 35 105 40 120 45 135 50 150

MSC2 60 67.5 75 82.5 90 97.5 105 112.5 120 127.5 135

Pollution abatement model example

What would it cost if firm 1 abated more?

$75 per unit

What would be saved if firm2 abated less?

$97.50 per unit

Costs would therefore be reduced until MAC = at each source

Units of A MSC 1 0 0 5 15 10 30 15 45 20 60 25 75 30 90 35 105 40 120 45 135 50 150

MSC2 60 67.5 75 82.5 90 97.5 105 112.5 120 127.5 135

Pollution abatement model example

What would cost effective solution be? 30 units at firm 1 20 units at firm 2 MAC = $90 at each source

Units of A MSC 1 0 0 5 15 10 30 15 45 20 60 25 75 30 90 35 105 40 120 45 135 50 150

MSC2 60 67.5 75 82.5 90 97.5 105 112.5 120 127.5 135

Pollution abatement model example

Analysis of abatement
160 MSC firm 1 140 120 100 80 60 MSC firm 2 (reverse x axis) 40 20 0 0 5 10 15 20 25 30 35 40 45 50 Units of pollution abated