Environmental Economics. Cost of Reducing Pollution Pollution Reduction MAC a CaCa PaPa Greater...
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Transcript of Environmental Economics. Cost of Reducing Pollution Pollution Reduction MAC a CaCa PaPa Greater...
Environmental Economics
Cost of Reducing Pollution
Pollution Reduction
MACa
Ca
PaGreater Abatement
A
Total abatementCosts =Area A$
Command and control
• Legislate emission levels– All firms required to reduce pollution to
specific levels
• ef is maximum pollution
• Forced to cut in half (0.5ef)
• What are costs of abatement?
Firm 1
$
Firm 2
Abatement
Total abatement for firm 1 Total abatement for firm 2
$
(Low cost firm)
(High cost firm)
MAC1
MAC2
.5ef
C1
C2
(ef,0)(0,ef)
Firm 1
$
Firm 2
Abatement
.5ef
$
Ce
a b
d
f
g
C2
C1
Total abatementCosts = a+d+f+b+g
Taxes
• Instead of command and control, why not tax emission
• Requires continuous monitoring
• In this case, Ce is per unit tax
• Two characteristics– Equal cost at the margin for both firms– Will show it holds total pollution constant to
command and control levels
Firm 1
$
Firm 2
Abatement
.5ef
$
Ce
a b
d
f
g
C2
C1
Total abatementCosts = a+d+f+b+g
Firm 1
$
Firm 2
Abatement
.5ef
$
Ce
a b g
C2
C1
Total abatementCosts = a+b+g
Ce
e1
Total cost savings=d+f
d
f
Taxes paid, Firm 1
Taxes paid,Firm 2
Firm 1
$
Firm 2
Abatement
.5ef
$
Ce
Ce
a b
d
f
g
C2
C1
Firm 1
$
Firm 2
Abatement
.5ef
$
Ce
Ce
a b
d
f
g
C2
C1
e1
Cap and trade
• Start with command and control levels– Receive permit to pollute 0.5ef
– must abate 0.5ef
• However, you can increase pollution levels only if you purchase the right to pollute from another manufacturer
• Who would sell their right to pollute? Who would purchase?
Firm 1
$
Firm 2
Abatement
.5ef
$
Ce
Ce
a b
d
f
g
C2
C1
e1
Firm 1
$
Firm 2
Abatement
.5ef
$
Ce
Ce
a b
d
f
g
C2
C1
e1
• Firm 2– Willing to pay area d+f+b for the right to
pollute more
• Firm 1– Needs b to increase pollution
• Trade will take place
• Notice that both firms are better off
• Costs of a abatement have fallen by d+f
