Chapter 5:Economics of Pollution Chapter 5:Economics of Pollution

Forms of PollutionForms of Pollution

Air pollutionWater pollution Land contaminationNoise pollution

Sources of PollutionSources of Pollution

Use of Natural ResourcesProduction of Goods & ServicesConsumption of Goods & Services

Sources of Air Pollution

Carbon monoxideSulfur dioxidesNitrogen oxidesHydrocarbonsParticulates

Reasons for PollutionReasons for Pollution

No one has or enforces private property rights over the environment being polluted

The collectively consumed nature of the environment being polluted

Costs of PollutionCosts of Pollution

Environmental decayLoss of incomeMedical expensesLoss to societyOpportunity costs of pollution control expenditures

Economic of PollutionEconomic of Pollution

Demand– Marginal Social Benefit, MSB– Marginal Private Benefit, MPB

Supply– Marginal Social Cost, MSC– Marginal Private Cost, MPC

Price

Reams per day

MSC

9

11

r0 r1

S = MPCC

B

A

D

D

13

Dead-Weight Loss=ABC

MSC>MPC: Paper is under-priced, but over-producedMSC>MPC: Paper is under-priced, but over-produced

Effects on the Polluter

Effects on the User:

Price

Kilowatt-hours per day

S = MPC

0.10

0.12

e0 e1

MSC

C

B

A

D

D

Dead-Weight Loss=ABC

MPC>MSC: electricity is under-supplied, but over-priced

0.08

Policies of Pollution ControlPolicies of Pollution Control

Moral suasion– Education– Recycling

Market solution– Law-suites– Pollution rights

Government solution– Taxes– Subsidies– Regulations

Economics of Pollution Control

The optimal amount of pollution control is achieved where its MSB = MSC

If taxation is used to control pollution, the optimal level of tax must be set to make MSB = MSC

Dollar per unit

Pollution control

MSB

T2

T*

C*

MSB=MSC

B

T1MSCMSC>MSB

MSB>MSC

Pollution Tax