Chapter 5: Economics of Pollution

Forms of Pollution Air pollution Water pollution Land contamination Noise pollution

Sources of Pollution Use of Natural Resources Production of Goods & Services Consumption of Goods & Services

Sources of Air Pollution Carbon monoxide Sulfur dioxides Nitrogen oxides Hydrocarbons Particulates

Reasons 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 Pollution Environmental decay Loss of income Medical expenses Loss to society Opportunity costs of pollution control expenditures

Economic 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 r0r1 S = MPC C B A D D 13 Dead-Weight Loss=ABC MSC>MPC: Paper is under-priced, but over-produced Effects on the Polluter

Effects on the User: Price Kilowatt-hours per day S = MPC e0e1 MSC C B A D D Dead-Weight Loss=ABC MPC>MSC: electricity is under-supplied, but over-priced 0.08

Policies 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 T1 MSC MSC>MSB MSB>MSC Pollution Tax