unit iv pollution control.ppt - iitg.ac.in · system of central planning (existed in the former...

Pollution Control

Pollution Control 211

Regulating PollutionRegulating Pollution

Rationale for Regulation:

Economic Regulation: refers to governmentintervention in private actions of firms and individuals.

Two theories of regulation:

Public Interest Theory and Interest Group Theory

Public Interest Theory: main purpose of regulation isthe promotion of public interest.



Rationale for Regulation:

Interest Group Theory: main purpose of regulation isthe promotion of narrow interest of particular groups ina society such as individual industries.

Major point of distinction between these twoapproaches is:

Public Interest Theory is the normative Theory (whichseeks to explain what should happen in an ideal world)while the Interest Group Theory is the positive theory(which seeks to explain why the world works as it does)



Under Public Interest Theory three general reasonsjustify for government regulation:

a.Imperfect competition

b.Imperfect information

c.Externalitiesc.Externalities

Imperfect Competition or Natural Monopoly:

Role of the government, in the presence of naturalmonopoly, is to control prices in order to protect theconsumers and prevent collusion and restrict mergersthat may create excessive market power in the handsof the monopolists.



Imperfect Information:

Here the role is to establish a set of liability rules toencourage the provision of safety-related quality.

Direct intervention in the market specifyingacceptable levels of quality.



Externalities:

Main problem is with the provision of public goodsand bads because private provision of these goods(with the element of publicness: non-rivalry and non-excludability) is inefficient.

In the case of public bads, the usual approach is forgovernment to define a set of institutions andregulation to govern provision of these public bads,e.g., the government establishes a set of regulationsto restrict the production of pollution.



Externalities:

Interest Group Theory of regulation maintains thatrent-seeking is the primary rationale for regulation.

Rent-seeking involves private individuals or firm usingthe government to guarantee extra profits (rent)through government mandated restrictions oneconomic activity.



A Political Economy Model of Regulation:

The basic problem of environmental regulation involvesthe government trying to induce a polluter to take sociallydesirable actions, which ostensibly are not in the bestinterest of the polluter.

The main problem, therefore, is determination of exactThe main problem, therefore, is determination of exactlevel of pollution which is best for the society.

In reality the government faces pressures from consumersand polluters.

Figure 1 presents a highly stylized schematic diagram ofthe interactions among government, polluting firms andconsumer citizens.


Legislature

Regulations

Votes

Stock, Bond Holders

Board of Directors

$, £

$, £

$, £$, £

(State Ownerships)

B

Wage, payments for goods


Judiciary

Government The Firm The Polity

Managers

Employees

Consumers/Citizens

Goods

Bads/Pollution

Figure 1



The Government as shown in figure 1, consists ofthree branches: the Legislature, the Judiciary and theRegulators

Legislature passes laws defining what the regulatorsare to do in controlling pollution.are to do in controlling pollution.

Regulators are charged with the responsibility ofimplementing the legislature's laws

Judiciary: the actions of the regulators are temperedby the judiciary.



The firm consists of several pieces:

the Board of Directors, Managers, Employees,Stock and Bond Holders.

The Board issues directives to the managers; themanagers issue directives to employees who producemanagers issue directives to employees who producethe product of the firm as well as pollution.

The key point is that regulators direct the Board to takecertain actions, but the Board is removed, by severalsteps, from the employees who actually generate thepollution.



There arises Principal-agent problem due to inabilityof the EPA (the principal) to completely control thepolluter (the agent).

The firm may not be a passive entity but may in factThe firm may not be a passive entity but may in factinfluence legislation, through lobbying or financialincentives (shown by the line B)

The third component of the figure, the consumersdirect votes and other influence to the legislature (lineA) while at the same time sending money to the firm inexchange for the goods consumed.



Two important lessons can be drawn from the figure:

1. There are many imperfect links between thelegislature and the pollution generating process.

2. The legislation does not necessarily act as anefficient benevolent maximizer of social well being.



• Inclusion of Line B: indicates regulation withendogenous politics.

• Omission of Line B indicates regulation withexogenous politics.exogenous politics.

• Positive interest group theory is consistent withendogenous politics model of regulation

• Environmental regulation is susceptible to interestgroup theory


Basic Regulatory Framework: Command and Control Basic Regulatory Framework: Command and Control

A. Command and Control:

Under this method the regulator specifies thesteps that individual polluters must take to solve apollution problem.

The essence of this method is:

1. The regulator collects the information necessary todecide the physical actions to control pollution

2. The regulator then commands the polluter to takespecific physical steps to control the pollution.



Command and Control can take several forms.

1. By example.

For example “the Clean Air Act”.

Further more, the specific pollution control equipmentsrequirement can be specified or alternatively theregulation may specify an emission limit for particularregulation may specify an emission limit for particulartypes of plants and particular pollutants.

2. Command and Control may be combined withsignificant fines and penalties associated with non-compliance. This, however, differs from the economicincentives to abate pollution on two salient points.



2.a. Restricted choice for the polluters as to whatmeans will be used to achieve an appropriateenvironmental target

2.b. A lack of mechanism for equalizing marginalcontrol costs among several different polluters.

3. The best analogy for Command and Control is thesystem of central planning (existed in the formerSoviet Union).

However major problem of this is the enormousrequirement of information.


Advantages:

a. More flexibility in regulating complex environmentalprocess and much greater certainty in howmuch pollution will result from regulations.


b. It simplifies monitoring of compliance with aregulation.


Disadvantages:

a. The regulatory system may be very costly to administeras informational costs are high.

b. It may reduce incentives to find better ways to controlpollution

c. Difficulty in satisfying the equi-marginal principle, i.e. it isalmost impossible for command and control regulations


almost impossible for command and control regulationsto ensure that the marginal costs of pollution areequalized among different polluters generating thesame pollution.

d. Finally, the greatest problem with the Command andControl principle is that the polluter pays only forpollution control not residual damage form the pollutionthat is still emitted even after controls are in place


Basic Regulatory Framework: Economic IncentivesBasic Regulatory Framework: Economic Incentives

Economic incentives provide rewards for polluters todo what is perceived to be in the public interest.

Three basic types of economic incentives include:fees, marketable permits and liability.fees, marketable permits and liability.

Fees:

Fees involve the payment of charge per unit ofpollution emitted. When a polluter must pay forevery unit of pollution emitted, it becomes in thepolluter’s interest to reduce emission.


Marketable Permit:

A marketable permit allows polluter to buy and sell theright to pollute.

Trading induces a price or value on a permit topollute, thus, causing firms to see polluting as an


expensive activity.

Less pollution means fewer permits need be bought.Similarly, there is an opportunity cost of emitting, i.e.by not emitting the firm can sell more permits.

A graphical illustration of the marketable permit isshown in figure 2.


Marketable Permit:

Assume a situation where two polluters exist and weare interested in allowing 100 units of pollution in total.

Let’s start by giving each firm 50 permits.


Let’s start by giving each firm 50 permits.

The equilibrium price of permit is p*.


MS1

Firm 1 Firm 2

Figure 2: Marginal savings from polluting functions for two firms. MS1, Marginalsavings from emitting, firm 1; MS2 Marginal savings from emitting, firm 2; e*,equilibrium holding of permits; p*, equilibrium price of permits.


MS2

P*

e*0

100

100

05050Firm 1 holdings Firm 2 holdings

Starting Point


Liability: The basic idea is that if you harm someone,you must compensate that person for damage.

Let us take an example of Hazardous waste storagefacility (‘dump’). The dump can do things to minimizethe risk of hazardous wastes leaking in to theenvironment through ‘Precaution’. (i.e. if the dump


environment through ‘Precaution’. (i.e. if the dumptakes a great deal of precaution the risk of a leak willbe low).

But precaution is expensive and ceteris paribus, thedump would prefer to take little precaution. Damage tosociety also depends upon the level of precaution.(this is illustrated in Figure 2).


Liability:

In figure 2, both costs to dump and damage to societyare shown as functions of the level of precaution. Thesocially desirable level of precaution is x*, at which themarginal costs of taking more precaution are just offsetby the reduction in marginal damage from taking more


by the reduction in marginal damage from taking moreprecaution.

Here, negligence liability works in the sense that thethreat of being held responsible from accidentdamages is often a sufficient incentives for firms totake the socially desirable amount of precaution.


FirmCosts of precaution

D(x)

Figure 3: An Illustration of precaution and liability


x*

MC (x*) = - MD (x*)

Precaution (x)

Expected accident cost

from precaution D(x)


Advantages of Economic Incentives: Compared tothe Command and Control Measures, EconomicIncentives has following advantages.

1. Informational requirements are less significant2. Economic incentives provide an incentive for a


2. Economic incentives provide an incentive for apolluter to innovate, finding cheaper ways ofcontrolling pollution.3. Economic incentives involve the polluter paying forcontrol costs as well as pollution damage. Therefore,there is no implicit subsidy to the industry.4. For many economic incentives the equi-marginalprinciple holds true.


Disadvantages of Economic Incentives: Majordisadvantages of Economic Incentives are as follows:1. Developing an economic incentive that efficientlyand perfectly takes complexities in environmentaltransformation into account can be very difficult.2. Given the political conditions, it is very difficult to


2. Given the political conditions, it is very difficult toadjust the level of incentives (level of fee, number ofmarketable permits issued) when there is great deal ofuncertainty associated with the environmentalproblem.3. Sometimes Instituting tax (on emission) may bevery difficult as it involves transfer of massive amountof wealth from firms to the government.


Complication for Environmental RegulationComplication for Environmental Regulation

A.Space and Time

Pollution regulation is complicated by the physicalenvironment that interposes itself between pollutersand consumers (illustrated in figure 4).

There are differences between pollution and ambientconcentration of the pollution.

Generally, it is the ambient concentration that causesdamages not the pollution.

However, ambient concentration are imperfectlyconnected with the emission, which need to beregulated.



A.Space and Time

This brings space and time into concern of theregulators. Generally, sources of pollution nearbywill generate more damage than sources located indistant suburbs.

Time, though less important than space, also exertsignificant influence in environmentaltransformation. There is hour-to-hour, day-to-dayand season-to-season variation in pollution.

Capturing these time and space factors in to decisionmaking is a bit difficult.


Natural Environment

Environmental Regulator

Producers Consumers

Emissions Emissions


Damage (to producers, consumers and ecosystems)

Environmental transformation(transport, decay, combination and deposition)

Ambient levels of pollution

Emissions Emissions

Figure 4


B. Efficiency versus Cost Effectiveness

Efficiency (with regulation) calls for emissions thatbalance the costs of emissions control with thedamage from ambient pollution, fully taking intoaccount the complexities relating emissions todamage.


damage.

Cost effectiveness with regulation refers to a set ofenvironmental regulation that can achieve emissiontarget at the least cost possible.


C. Ambient-Differentiated versus Emission-Differentiated Regulation:

Targets of the regulator may be ambient targets oremission targets. Choosing out this is a bit complicated.

Typically, a unit of pollution form one polluter will have adifferent effect on ambient concentrations than a unit of


pollution from another polluter. An ambient-differentialregulation will control these two polluters differently,based on their different contributions to ambientconcentrations.

An emissions-differentiated regulations will ignore thedifferences between the two polluters, though the overalllevel of emissions will still be controlled in such a way asto achieve the ambient target.


Basic Issues in Environmental RegulationBasic Issues in Environmental Regulation

1. Debate over whether command and control oreconomic incentives

2. Public sources of pollution and controlling them

3. Information, particularly private information pollutersmay have that regulator needs

4. Risk and how to deal with the problems of risk. What4. Risk and how to deal with the problems of risk. Whatsort of regulations are appropriate?

5. Growing competition between jurisdiction vis-à-visenvironmental regulations

6. Incidence of regulations: who bears the burden (eitherin cost or pollution damage)? Who reaps the benefits?

7. Innovations and technical change.


Several issues complicate using incentives to controlpollution: Space, Time and Imperfect competition

I. Space :

A.Sources, Receptors and Transfer Coefficients:

Let us take an example of a river.

Basic Regulatory Framework: Basic Regulatory Framework: Emission Fees and Marketable Permits

Two factories discharge organic waste (sewage) in to theriver

A municipal water supply takes water from the river

Factories are in the upstream of the municipal wastesupply

Further one goes downstream the smaller the effects frompollution.


A. Sources, Receptors and Transfer Coefficients:

Now to correctly regulate the two factories their individualeffects on the municipality have to be taken into account.At this point, to take space in to account, let’s considertwo points: sources and receptors. A source is a point ofdischarge of pollution (e.g. a factory). A receptor is a


discharge of pollution (e.g. a factory). A receptor is apoint at which people care abut the level of ambientpollution.

Although there are several receptors, in practice, we willidentify a small set of receptors where pollution levelswill be measured. Receptors are scattered over spaceand serve as a good proxies for overall level of pollution.


In general, there is some relationship between emissionat various sources, e1, e2 . . . ei and concentration ofpollution at any receptor j.

pj = fj (e1, e2, . . .,ei) + Bj (1)

where, Bj background level of pollution at j (perhapszero).


zero).In many environmental problems, the physicalenvironment is linear,

pj = ∑i aij ei + Bi (2)

The coefficient aij is called the transfer coefficient. Weassume Bj = 0. In equation (2), if we change emission atsome source i by a little amount ( ∆ei), pollution willchange by aij∆ei


The transfer coefficient between the source i and thereceptor j is defined as the ratio of the change inpollution at j to the change in emission at i .


pollution at j to the change in emission at i .aij = ∆ pj/ ∆ei (3)

Equation (3) gives the conversion rate for emission to ambient concentration.


Basic Regulatory Framework: Basic Regulatory Framework: Emission Fees and Marketable

Permits

B. How much Pollution do we want?

Let’s start with what is the efficient level of pollution?

Efficiency involves equating marginal damage withEfficiency involves equating marginal damage withmarginal savings to the firm from pollutiongeneration.

To link these we express marginal damage of a firmas marginal damage per unit of emissions.



Permits

B. How much Pollution do we want?

Let us term marginal damage per unit of emissionsfrom source I as the function MDEi (ei) which iscontrast to marginal damages per unit of ambientpollution, MD(p)

MDEi is the ratio of the change in damage {D(p)} to thechange in emission at source i.

MDEi (ei) = {D (p + ∆p) – D (p)}/ ∆ei

= MD (p). ∆p/ ∆ei (4)

= ai MD (p)


As stated above, efficient amount of pollution requiresequating marginal savings from emission with marginaldamage. If there are i = 1, 2, …I sources of pollution,then following must hold:


Permits

-MCi (ei) = MDEi (ei) = ai MD (p), for all i = 1, …, I

(5)

Now for any two sources m and n

MCm(em)/am= MCn(en)/an = MD (p) (6)


MC/a is marginal cost per unit of ambient pollution.i.e. marginal cost in terms of ambient pollution must beequal to the negative of marginal damage.

Thus efficiency calls for all sources to have the samemarginal costs of emissions, normalized by the sources oftransfer coefficients.


transfer coefficients.

If ‘a’ is high, MC of emissions should be larger.

Two conditions for efficiency:1.Marginal cost of emission, normalized by he transfercoefficient must be equalized for all sources2.Normalized marginal cost must equal the negative ofmarginal damage.


C. Emission Fees:We seek emission fees, ti, one for each firm i that yieldsefficiency.These are ambient differentiated fees. Whatever fee isused, the firms will respond by minimizing direct costsplus fee payments. This is equivalent to setting


plus fee payments. This is equivalent to settingmarginal cost equal to negative of the fee:

MCi (ei) = - ti, for all sources of I (7)

Thus the condition for efficiency can be re-written as,tn/an = tn/am for all firms n and m (8)

And, tn = an MD (p) for any firm n (9)


C. Emission Fees:

Equation (8) implies that emission fees levied on thefirms must be equal after normalizing by the transferco-efficient or control costs across firms are equal.


Equation (9), the second condition, implies that for anyfirm marginal damage in emission units (MDE) must beequal to the emission fee (t), or marginal pollutiondamage and control costs are equalized.

Alternatively all firms face same emission fee per unit ofambient pollution but to convert it to emission units, itmust be multiplied by appropriate transfer coefficient.


Thus, it can be concluded that, ambient differentiatedemission fees can achieve efficiency.

However, it is too complicated to let emission vary fromlocation to location.

Normally most emission fees do not depend upon location


Normally most emission fees do not depend upon locationeven though damage do.

Thus, is applying uniform emission fee inefficient whendamages depend on location?

Let us consider the following illustration done (with thehelp of figure – 5).


In figure 5, marginal savings curve is assumed same forevery firm. As well as marginal damages, normalized by thetransfer coefficient.

t*1, t*2 are efficient taxese*1, e*2 are emissions from the two firms (which are

efficient)


efficient)uniform emission fee

vemissions from firm 1 or firm 2t the shaded area are deadweight loss.

The optimal uniform tax is one that minimizes the total areaof the two triangles.

The loss from a uniform fee depends on the nature of themarginal cost and damage functions.


MDE1 (e1)

MDE2 (e2)t*1

t*2

t Fig. 5.a


MS (e)

t*2

e*1 e*20 e


MDE1 (e1)

MDE2 (e2)

t*1

t Fig. 5.b


MS (e)

t*2

e*1e*20 e


D. Marketable Ambient Permit:An ambient pollution permit for a receptor “j” gives theholder the right to emit at any location, provided theincremental pollution at receptor ‘j’ does not exceed thepermitted amount.

Thus an ambient pollution permit system is a set of


Thus an ambient pollution permit system is a set ofpermits, distributed to sources in a well-defined way ofcomputing the effects of emissions on ambient pollution atreceptors along with a right to buy and sell these permits.

Two Firms: Let’s consider the case of two firms and onereceptor. Suppose EPA issues L1 amount of permits to firm1 and L2 ambient permits to firm 2 for a total of L = L1 + L2

permits.


D. Marketable Ambient Permit:

Now after trading of permits, let L1 and L2 be thenumber of permits eventually held by the firms.i.e. L1 +L2 = l1 + l2 (1)

Equation (1) raises many questions:


Equation (1) raises many questions:

a. What will the price of permits be?b. How much will each firm emit?

Answering the second question first - a firm can emitwhatever is allowed by its permit holdings.


Emission and ambient pollution levels are connected by transfer coefficient.

i.e. a1e1 = l1 (2)and a2e2 = l2 (3), provided all permits are used.

Suppose, the price of permits is π (an unknown). Then


Suppose, the price of permits is π (an unknown). Then how much pollution will be emitted?

However many permits a firm may hold, if the price of permits is greater than the marginal savings from emitting the firm will want to sell some permits and emit less.


If the price of permit is less than the firms’ marginal savings form polluting, buying permits is easier than controlling emissions.

We try to find the price for which the desired emission levels for each of the two firms corresponds to the number of permits issued.


of permits issued.

Total costs for each firm are:TC1 (e1) = C1(e1) + π (l1 – L1), where Ci (ei) is the

direct cost to firm i,= C1 (e1) + π (a1e1 – L1) (4)

And,TC2 (e2) = C2 (e2) + π (a2e2 – L2)

= C2(e2) + π (a2e2 –L2) (5)


In order to Minimize total costs each firm sets the marginal total costs (MTC) to Zero, i.e.

MTC1(e1) = MC1 (e1) + a1π = 0 (6)MTC2(e2) = MC2(e2) + a2π = 0 (7)

Which implies: MC1(e1)/a1 = MC2 (e2)/a2 = - π


Which implies: MC1(e1)/a1 = MC2 (e2)/a2 = - π

Or, MS1(e1)/a1 = MS2(e2)/a2 = π (8)

Equation (8) says that marginal savings normalized by thetransfer coefficient should equal to the permit price. This isanalogous to the working of ambient emission fee whichstates that marginal savings normalized by the transfercoefficient equals the same number for all firms.


There is one additional equation that gives usinformation.

Combining equations (1), (2) and (3) we get,


a1e1+a2e2=L (9)

Equations (8) and (9) constitute three separateequations in three unknowns (e1, e2 and π) and thuscan be solved.


The same exercise can be extended to the multiple sourcesand receptors and can be arrived at the solutions for ambientpollution permits.

E. Zonal Instruments:

There is an intermediate territory between completely


There is an intermediate territory between completelyundifferentiated emission fees or permits (where space isignored) and ambient fees or permits which are called zonalfees or permits.

Unlike undifferentiated emission fee (where same fee wouldapply to all polluters in a region irrespective of their effect onambient pollution level) in zonal system, a region or riverbasin is divided in to zones – perhaps a few or perhaps many.


E. Zonal Instruments:Within each zone, the same emission fees applies anddifferent zones have different fees.

Under zonal marketable permits, within a zone, permitsare traded on one-for-one basis with none of thecomplexities of ambient permits discussed in the


complexities of ambient permits discussed in theprevious section.

However, if trades are made between firms that are indifferent zones, trade is an ambient permit system withdifferent transfer coefficients for the different zones.

In both the systems, zonal instruments result in efficiencygains.


II. Time:Time affects pollution abatement decisions (pollution

control measures in our case) as it affects differenttypes of pollutants, particularly for those thataccumulate.

The reason is obvious. When pollutants accumulate, the


The reason is obvious. When pollutants accumulate, thedamage from emissions today is not just the damagetoday, but the damage in future time periods whentoday’s emissions are still resident in the environment.

A.Stock Pollutant: pollutants that accumulate over timeare called stock pollutants.We are generally concerned with the stock ofpollutants rather than today’s flow of pollutants.


Definition of Stock Pollutant:Assume a pollutant accumulated in the environmentAccording to the process

s(t) = δ s(t – 1) + e(t) (1), where, s(t) isthe stock of the pollutant at any given time t, e(t) isemissions of the pollutant and δ is the persistence


emissions of the pollutant and δ is the persistencerate of the pollutant.

Further assume that pollution damage depends onlyon s(t).Then if δ >0 is a stock pollutant (with respect to thetime period). If δ =0, the pollutant is a flow (or fund)pollutant.


Equation (1) describes the dynamic process ofpollutant accumulation, δ indicating fraction of totalstock of pollutants left in the air after one timeperiod.


Alternatively, (1- δ) is the fraction of the stock that iscleaned out of the environment in one time period.


Examples of stock pollutants include Green HouseGases, Choloroflurocarbons (CFCs). Soot emittedinto the atomosphere are flow pollutants.

Efficiency of a Stock Pollutant:Measuring efficiency of Stock Pollutant is a bit


Measuring efficiency of Stock Pollutant is a bitcomplex which requires equalizing marginal cost ofemissions with the marginal damage of the pollutantwhere the marginal damage will occur over a periodof time.

Let’s examine it with the help of a few equations.


Suppose we are sitting in the present at time t = 1.

The net costs of pollution emission et, can beexpressed as

Net Costs = NC = ∑∞t=1 βt-1 {Ct (et) + Dt (st)} (2)


Net Costs = NC = ∑∞t=1 βt-1 {Ct (et) + Dt (st)} (2)

where β is used to discount the future [equal to1/(1+r) where r is the discount rate], indicating howwe should trade costs of today with costs tomorrow.


To determine the amount of emissions at any point intime, et that minimizes the costs, we need to look atthe marginal of equation (2) with respect to et.

We can try to determine the best current level ofemission e1:


emission e1:

∆NC/∆e1 = ∑∞t=1 βt-1 {∆Ct (et)/∆et + ∆Dt

(st)/∆et} = 0

= ∑∞t=1 βt-1 {∆Ct (et)/∆e1 + [∆Dt

(st)/∆st ] (∆st/∆e1} = 0 (3)


Focusing on the first term in braces in equation (3),note that we need to worry about the marginal costonly when t = 1. All costs for t = 1 are constants withrespect to e1.

Thus, ∆Ct(et)/∆e1 = 0 for t = 1.


Thus, ∆Ct(et)/∆e1 = 0 for t = 1.

Furthermore, inspection of equation 1 indicates thatthe stock of pollution at time t is simply the sum ofpreviously emitted pollution, appropriately decayed:

st = et + δet-1 + δ2et-2 + …+ δie

t-1 + …+ δt-1e1+

δtso (4)


Thus,∆st/∆e1 = δ t-1 (5)

putting all of this together allows us to rewrite equation (5) as,

∆NC/∆e1 = MC1(e1) + ∑∞t=1 βt-1 δt-1 MDt(st) = 0

or

MS (e ) = ∑∞ βt-1 δt-1 MD (s ) (6)


MS1(e1) = ∑∞t=1 βt-1 δt-1 MDt(st) (6)

Equation (6) indicates that for efficiency, we should set themarginal savings from emitting a unit of pollution today equalto the sum of all marginal damages that may occur in thefuture, with those marginal damages discounted by twofactors: the discount factor (β) and the persistence rate of thepollutant (δ).


B. Temporal Variability:There is temporal variability of pollution which variesthrough time both because of temporally varyingemission rates as well as temporally varyingassimilative capacity.

Due to temporal variability of pollution, damages also


Due to temporal variability of pollution, damages alsodiffers temporally. e.g. air emission in the winter maybe less worrying than summer emission in smog-proneareas.

This requires that regulation could be time varying topromote efficiency.


III. Multiple Pollutants:

Generally, an environmental problem is caused by several pollutants instead of a single one.

In the presence of multiple pollutants, controlling


In the presence of multiple pollutants, controllingpollution requires controlling all the pollutantsresulting in the pollution.

Each pollutants should be controlled taking intoaccount the cost of controlling it as well as thecontribution the pollutant makes to damage.


III. Multiple Pollutants: Efficient levels of pollution require the same twoconditions as set forth in equation (5) and (6).

That is, marginal savings from emitting the differentcompounds must be equated taking into account thetransfer coefficients.


transfer coefficients.

And these marginal costs must be equal to marginaldamage adjusted for the transfer coefficient.

For handling a pollution problem resulting from multiplepollutants ambient permit system can be adopted.


IV. Implementing Marketable Permits:Emission fees are significantly simpler to implementthan marketable permits.

The major difficulty with the implementation ofemission fees is that they require a more active


emission fees is that they require a more activeregulatory authority to set and adjust their levels,which is problematic to institute with.

Marketable Permits in this sense are more popularthan emission fees. It is widely used in USA.However, Marketable Permits are beset with certainproblems.


Problems of implementing Marketable Permits:

a. Initial Permit Issuance: The attainment of efficiency withthe distribution of marketable permits does not dependon the fact that which firm initially receive the permits.But problem arises regarding new entrant. Do the new


entrants receive free permits? If not, incumbents couldpotentially use permits to retards permits.

b. Dominant Firms: The presence of dominant firms mayalso influence initial allocation of permits resulting in lossof some portion of the benefits derived from usingmarketable permits.


c. Market Thinness: Marketable Permits also do notseem suitable in a situation where there is smallnumber of firm in the market. The majordisadvantage of market thinness is that equalizingmarginal control cost among firms may not beachieved. Although, the correct amount of


achieved. Although, the correct amount ofpollution will result but costs will be excessivelyhigh.

d. Transaction Costs: In the presence of transactioncosts, trading of marketable permits may not resultthe opportunity costs of emitting equal to the permitprice.


There are three sources of transaction costsassociated with the marketable permits: searchand information costs, bargaining and decisionmaking costs and monitoring and enforcementcosts (Robert Stavins 1995).


V. Comparative Regulatory Analysis:

Empirical analyses show that there is gradual shiftfrom command and control measures to ambientpollution permits because the latter is more easierto implement than the former.

unit iv pollution control.ppt - iitg.ac.in · system of central planning (existed in the former...

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