Pollution Control

In class we have often used the example of pollution as one of those negative externalities that is difficult to measure and regulate. Pollution is indeed a complex topic to tackle, but it impacts our lives tremendously. Many health problems including asthma, cancer, learning disabilities, metabolic conditions, and more are linked to the environment in which we live. Pollution control measures, including the Clean Air Act, created problems for many firms. It is expensive to meet pollution control specifications which put some firms out of business. In our textbook, the author points out the proposition economists made in response to firms' compaints. He sats that economists came up with the "cap-and-trade" policy in which pollution is reduced just as much as it was with the former policy yet these achievements are made at a lower cost overall. The "cap" is the government set level of how much pollution can be created or emitted. "Firms that reduced emissions by less than the required limit could buy polluttion permits from other firms that reduced their emissions by more than their limit". Firms with a lower cost of reducing their emissions can achieve greater reductions than firms with high costs of reducing their emissions. The firms with the lower costs can trade their permits (the amount of left over pollution they can still create) to firms that have higher costs. The price of permits was established "in an 'emissions permit market'" which is kind of similar (I think) to what we saw on Aplia today in the Hunting and Fishing Experiment in which permits were introduced. Pollution control is also mentioned in the textbook in the discussion of incentive policies as a way to deal with externalities (Chapter 18). Effluent fees (or taxes on pollution) seem to be a good idea because the person who reduces their pollution the most pays the lowest amount in taxes. Another benefit is that "with the tax, the invisible hand guides the traders to equate the marginal social cost to the marginal social benefit and the equilibrium is socially optimal".

I think the cap-and-trade is good because it achieves the same reduction at a lower cost, but I think a problem arises regarding distribution of pollution. Firms with high costs of reducing their pollution will end up polluting their surrounding environment more. For people in the community where these firms are, this cap-and-trade may really hurt them.


morty said...

hmmmm, very interesting. Although it may be cheaper in the long run while still cutting down on polution it does seem kinda imoral to sell polution rights to one another. But hey if it saves money im all for it.

Dr. Tufte said...

The selling of licenses that was simulated in the hunting and fishing (tragedy of the commons) experiment is precisely the motivation behind environmental regulators licensing rights to pollute.

The location issue towards the end of the post probably isn't a reasonable criticism of the idea of selling and trading permits, because it isn't at all clear that this sort of firm would pollute less under other methods of control. It could just be closed down, but that would create all sorts of additional problems.

Big progress has been made on these issues. During my first semester as a faculty member (at the University of Alabama in 1989) I couldnt' get students to reasonably discuss these issues because they had no experience with market solutions to problems. Fifteen years later, there has been a lot of improvement.

As to the immorality mentioned by Morty, I think this is something that needs to be overcome. The issue is the elimination of pollution vs. the control of it. Many people seem to think that the latter is somehow immoral (and therefore so is a licensing schems that would support it). Yes those same people bring polluted dishes to their sink every day, and dilute that pollution sufficiently to call the dishes clean rather than sterilize them (the former is controlling the latter is eliminating the pollution).

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Jordan said...

Dr. Tufte said:

"The issue is the elimination of pollution vs. the control of it."

I have to agree. It doesn't seem feasible that we will be able to completely eliminate pollution (at least, not anytime soon). The pollution rights will not only control how much pollution will be emitted, but it will also give incentive to firms to lower pollution. To me, that sounds like a very moral thing to do.

Dr. Tufte said...

Morality is a personal thing, so I'm going to leave this alone. Suffice to say that others might not find this moral.