Pollution control: Instruments Flashcards
When selecting pollution control
instruments, which criteria (= principles) is cost efficiency?
If one particular instrument can attain a target at lower real cost than any other can, then that instrument is cost-effective.
Cost-effectiveness is clearly a desirable attribute of an instrument.
– Using a cost-effective instrument involves allocating the smallest amount
of resources to pollution control, conditional on a given target being
achieved.
– It has the minimum opportunity cost.
– Hence, the use of cost-effective instruments is a necessary for achieving
an economically efficient allocation of resources.
Outline the least-cost theorem of pollution control 3 important points
1) Least-cost control regime: We want to achieve the greatest environmental benefit at the lowest possible cost. To do this, we need to make sure that the cost of reducing pollution is the same across all firms that are required to control their pollution levels. Therefore we wan the marginal cost of abatement to be equalized for all firms undertaking pollution control.
2) Unequal abatement effort: Despite aiming for equal costs of reducing pollution, not all companies will end up putting in the same amount of effort to reduce their pollution levels. Some companies may find it easier or cheaper to reduce their pollution than others. So, in a least-cost solution, not every polluter will have to reduce their pollution by the same amount. In this theory it would be more costly to have all firms abating the same amount, if some can do it cheaper.
3) Cost efficiency: When companies have different costs associated with reducing pollution, it’s more efficient for the ones with lower costs to do most of the pollution reduction work. This means that the companies that can reduce pollution at a lower cost will be the ones primarily responsible for reducing overall pollution levels. However, this doesn’t mean that all pollution reduction efforts will come from these low-cost companies, just that they’ll contribute the most to the overall reduction.
Graph in the book at page
How should the overall target be shared between the abaters, when we think from the cost efficiency criteria? Imagine there are many sources of an emission and so many abaters.
The principle of cost efficiency provides a very clear answer: a necessary condition for abatement at least cost is that the marginal cost of abatement be equalised over all abaters. This result is known as the least-cost theorem of pollution control.
Outline the important conclusions from the least cost theorem
Least-cost control regime: We want to achieve the greatest environmental benefit at the lowest possible cost. To do this, we need to make sure that the cost of reducing pollution is the same across all firms that are required to control their pollution levels. Therefore the Marginal cost of abatement should be equalized over all firms undertaking pollution control.
Unequal abatement effort: Despite aiming for equal costs of reducing pollution, not all companies will end up putting in the same amount of effort to reduce their pollution levels. Some companies may find it easier or cheaper to reduce their pollution than others. So, in a least-cost solution, not every polluter will have to reduce their pollution by the same amount.
Cost efficiency: When companies have different costs associated with reducing pollution, it’s more efficient for the ones with lower costs to do most of the pollution reduction work. This means that the companies that can reduce pollution at a lower cost will be the ones primarily responsible for reducing overall pollution levels. However, this doesn’t mean that all pollution reduction efforts will come from these low-cost companies, just that they’ll contribute the most to the overall reduction.
In essence, these conclusions highlight the idea that when it comes to controlling pollution, we should aim for a system that minimizes the total cost of reducing pollution while allowing companies with lower costs to do the bulk of the pollution reduction work.
Is cost-effectiveness in conflict with any of the other criteria
for selecting pollution control instruments from the picture?
Equity: Cost-effective solutions often prioritize reducing costs over distributing those costs fairly across different socio-economic groups. A pollution control instrument that is the most cost-effective might disproportionately burden lower-income communities or fail to consider how costs (or savings) are distributed among different stakeholders.
Ancillary benefits: Cost-effectiveness focuses on achieving the main target at the lowest cost, possibly overlooking secondary benefits. For example, a policy that prioritizes cost might opt for cheaper technologies that reduce emissions but miss opportunities for improving public health or promoting technological innovation.
Flexibility: Instruments optimized for cost-effectiveness may not be as adaptable to changing conditions or new information because their design is so focused on minimizing current costs. Flexibility might require initial or ongoing investments that are not justified under strict cost-effectiveness criteria but could provide long-term benefits by allowing the policy to adapt to unforeseen circumstances.
Costs of use under uncertainty: Instruments that are cost-effective under current conditions may involve higher risks or inefficiencies if conditions change or if initial assumptions prove incorrect. An instrument’s reliance on specific data or projections might not account adequately for uncertainties, which could lead to significant inefficiencies.
Information requirements: Cost-effective solutions may sometimes require extensive data to ensure they are targeting the most economically efficient options, which could be expensive or technically challenging to gather and maintain.
While these conflicts can exist, it is also possible for well-designed policies to balance cost-effectiveness with these other criteria through careful planning and consideration of long-term impacts versus short-term gains.
Think about the graph in book showing the least cost theorem in action. What happens in it?
See lecture 6 in notebook for graph.
Firm A has a lower marginal abatement cost (MC_A) then Firm B, why it would be cheaper for Firm A to abate pollution. Following the theory of the least cost theorem Firm A would need to do a greater abatement effort, abating most of the pollution, beacuse it´s the most cost efficient. In this example we need to abate 40 pollution (target), where Firm A will have to abate 25 (area alpha, light blue) and Firm B will have to abate 15 (beta, dark blue area). The different colored blue area is also counted in two times.
What different instruments categories do we have?
Institutional approaches to facilitate
internalisation of externalities
Command and control instruments
Economic incentive (market-based)
instruments
Describe to me the approach which facilitate voluntary,
decentralised internalisation of externalities
One approach to achieving environmental policy targets is to improveexisting
social or institutional arrangements that facilitate environmental damage-
reducing voluntary decentralised behaviour.
Two variants of this approach:
– Improve “the effectiveness of property rights regimes” in bringing about socially
efficient allocations of resources;
– Encourage greater “social responsibility” in making choices and taking decisions.
Each of these two variants shares the characteristic of potentially preventing
the emergence of externalities, or internalising externalities which have
arisen. => “No need for government intervention”.
Outiline the instrument “Institutional approaches to
facilitate internalisation of
externalities”
It includes:
Facilitation of bargaining
- In simpler terms, “facilitation of bargaining” refers to making it easier for parties involved in negotiations or discussions to reach agreements or compromises. When we say that the cost of or impediments to bargaining are reduced, it means that obstacles or barriers that could hinder the negotiation process are minimized or eliminated.
Specification of liability
- Liability (judicial system) can be used as a tool to address environmental hazards. Imagine a rule where anyone or any organization is responsible for any harmful effects their actions have on others or the environment. This means if someone causes damage, they’re held accountable for it. Essentially, this legal principle gives property rights to the party that’s harmed by someone else’s actions. For example, if a company pollutes a river and harms the surrounding community, those affected gain rights over the clean environment they’ve lost due to the pollution.
Development of social
responsibility
-
Outline Ronald Coase theory about the connection between property
rights and the likelihood of efficient bargaining solutions to
inefficient allocations of resources.
Coase proposed that a necessary condition for bargaining
between agents to bring about efficient resource allocation is the
existence of a “well defined” and enforceable allocation of
“property rights”.
- Lack of property rights: Some environmental resources don’t have clear ownership or rules about who can use them and how. In other words, there’s no established ownership or control over these resources. This means that everyone has access to the resource (Open access resource), and it’s difficult or costly to exclude anyone from using it.
Coase also showed that efficient bargaining may be hindered by
the presence of non-trivial transactions costs.
- First bargaining solutions require that the expected gains from bargaining are larger than the expected costs of carrying out that bargaining. Thus, bargaining is facilitated by the existence of a 1) “relatively small
number of affected parties”, and by all such 2) “parties being easily
identifiable”.many environmental problems does not satisfy those two properties. E.g. Environmental degradation affects many people and in many cases, as with vehicle pollution, is attributable to a large number of sources. It is often difficult to identify all affected parties, and the transactions
costs associated with undertaking a bargaining exercise can be enormous. Hence where the number of affected individuals is large, the scope for efficient bargaining behaviour is restricted.
- Secondly because environmental problems like climate change affect future generations and we can’t directly negotiate with them, relying solely on bargaining between present parties won’t be enough to solve these global challenges.
Give me an example of an environmental resource, which property right are not well-defined.
Ocean.
- Problems: Plastic (waste), overfishing, pollution.
Overfishing: Since anyone can fish in the ocean without restrictions, there’s a risk of overfishing. People might catch more fish than the ocean can naturally replenish, depleting the fish population over time.
Tragedy of the Commons: This situation often leads to what’s known as the tragedy of the commons. Because no one owns the ocean or its fish, individuals may act in their own self-interest by catching as many fish as possible, without considering the long-term impact on the overall fish population or the sustainability of the resource.
Difficulty in Management: Without clear ownership or regulations, it’s challenging to manage the ocean´s resources effectively. There’s no one responsible for ensuring the sustainable use of the fishery or implementing measures to prevent overfishing.
Our athomosphere
- Problems: The climate crisis.
How can the government facilitate bargaining for efficiency gains in environmental management which are cost-effective?
The government can facilitate bargaining for efficiency gains in environmental management through several key actions:
Defining Property Rights: By clearly defining and allocating property rights, the government can establish rules for the use and management of environmental resources, making negotiation and cooperation among stakeholders more feasible and effective.
Environmental Monitoring: The government can take on the responsibility of monitoring environmental conditions, identifying sources of pollution, and disclosing this information to affected parties. This helps stakeholders understand the impacts of pollution and encourages cooperation in finding solutions.
Access to Judicial System: Ensuring easy, affordable, and equitable access to the judicial system allows affected parties to seek legal recourse when environmental harm occurs. This supports the liability principle, where polluters are held accountable for the damage they cause, incentivizing responsible behavior and providing a mechanism for resolving disputes.
What does Elinor Ostrom argue in regards to the role of the government?
She has shown that in many societies bargaining solutions to resolve
disputes are often embedded in social norms, and collective choice mechanisms
operating within these frameworks.
These social structures can be of great efficacy and can bring about efficient resource
allocations even in the context of common property (as opposed to private property)
regimes.
BUT
Increased complexity of social and economic systems, along with greater
geographical and social mobility, tends to weaken those traditions and norms.
We seek an incentive mechanism that induces the potential injurerto
undertake the socially efficient level of precaution, Q*. Liability for damage might be one such mechanism. What are the two
possible versions of the liability principle?
Strict Liability
- If an accident occurs, the injurer pays full compensation to the victim.
Negligence Liability
- If an accident occurs, the injurer pays
full compensation to the victim only if
the injurer were not, prior to the
accident, undertaking the efficient
level of precaution. If it were, then the injurer is not required to pay any
compensation
What is the socially efficient level of precaution Q*?
See graph in notebook.
The level of precaution
applied is socially
efficient when the net
benefit (B – C) from
precaution is maximised.
This is shown at Q = Q*
where the slopes of the B
and C functions are
equalised. Hence the
marginal benefit of
precaution and the
marginal cost of
precaution are equal at
the socially efficient level
of precaution, Q. That
is, MB(Q) = MC(Q*).
