0000_lec8os [POL TAX]
POLLUTION TAX
Using the paper market as an example:
• Paper mills generate chemical wastes as
part of their production process and dump
some of these wastes into rivers.
• If a city downstream was required to treat
the river water to make it safe for drinking,
it might impose a pollution tax to cover the
cost of additional water treatment.
POLLUTION TAX
• The paper market is a market that
generates spillover costs.
• Another word for spillover cost is
external cost.
• A pollution tax internalizes the
externality.
• If the firm pays $4 per gallon of waste,
the cost of polluting the river is
internal to the firm, not external.
FIRM’S RESPONSE TO
POLLUTION TAX
• Most polluting firms can control the
amount of polluting waste they dump
into the environment;
• As a firm continues to decrease waste,
it becomes progressively more
expensive to do so.
COST
COST PER
PER TON
TON OF
OF PAPER
PAPER WITH
WITH VARYING
VARYING
AMOUNTS
AMOUNTS OF
OF POLLUTION
POLLUTION
Waste
Waste
ton
ton
55
44
33
22
11
00
Production
Production Cost
Cost Tax
Tax Cost
Cost Total
Total Cost
Cost per
per
per
per ton
ton per
per ton
ton per
per ton
ton
$60
$20
$80
$60
$20
$80
$61
$16
$77
$61
$16
$77
$64
$12
$76
$64
$12
$76
$71
$8
$79
$71
$8
$79
$86
$4
$90
$86
$4
$90
$116
$0
$116
$116
$0
$116
COST PER TON OF PAPER WITH VARYING
AMOUNTS OF POLLUTION
Waste Production Cost Tax Cost Total Cost
per ton per ton per ton
5
$60
$20
$80
4
$61
$16
$77
3
2
1
0
$64
$71
$86
$116
$12
$8
$4
$0
$76
$79
$90
$116
per ton
MARGINAL PRINCIPLE
Increase the level of activity if its
marginal benefit exceeds its marginal
cost, but reduce the level if the
marginal cost exceeds the marginal
benefit. If possible pick the level at
which the marginal benefit equals the
marginal cost.
MARKET EFFECTS OF A POLLUTION
TAX
•• The
The original
original price
price of
of $60
$60 just
just covered
covered the
the cost
cost of
of
producing
producing paper
paper without
without the
the pollution
pollution tax;
tax;
•• The
The tax
tax increases
increases the
the cost
cost of
of producing
producing paper
paper
because
because the
the typical
typical firm
firm pays
pays some
some pollution
pollution tax
tax
and
and incurs
incurs some
some costs
costs when
when it
it cuts
cuts back
back its
its
pollution;
pollution;
•• Since
Since old
old price
price is
is not
not high
high enough
enough to
to cover
cover higher
higher
production
production costs,
costs, some
some firms
firms leave
leave the
the market;
market;
•• The
The supply
supply curve
curve shifts
shifts left:
left: at
at each
each price
price aa
smaller
smaller quantity
quantity of
of paper
paper will
will be
be supplied;
supplied;
•• The
The leftward
leftward shift
shift of
of the
the supply
supply curve
curve increases
increases
the
the equilibrium
equilibrium price
price of
of paper
paper (point
(point ii to
to point
point f).
f).
MARKET EFFECTS OF A POLLUTION TAX
Price per ton
of paper $$
Supply Curve with $4
pollution tax
f
68
60
i
Initial Supply
Demand
80
100
Tons of paper per day
MARKET EFFECTS OF A
POLLUTION TAX
• Like other taxes, a pollution tax is
partially shifted to consumers in the
form of a higher price;
• When consumers face the full cost of
producing paper, they decide to
consume less of it.
THE MARKET EFFECTS OF A POLLUTION
TAX
How does the pollution tax affect the
volume of waste dumped into the river ?
1. Abatement
There
There is
is less
less waste
waste per
per ton
ton of
of paper
paper (3
(3 gallons
gallons
instead
instead of
of 55 ).
).
2. Lower Output
The
The industry
industry produces
produces less
less paper
paper (only
(only 80
80 tons
tons
per
per day
day instead
instead of
of 100).
100).
COMMAND AND CONTROL
REGULATION POLICY
The government commands each
firm to produce no more than a
certain volume of pollution and
controls the firm’s production
process by forcing the firm to use
a particular pollution-control
technology.
COMMAND AND CONTROL
REGULATION POLICY
The mandated abatement technology
is unlikely to be the most efficient
technology for two reasons:
•• The
The regulatory
regulatory policy
policy specifies
specifies aa single
single abatement
abatement
technology
technology for
for all
all firms;
firms; while
while efficient
efficient for
for one
one
firm,
firm, this
this may
may not
not be
be efficient
efficient for
for others.
others.
•• The
The regulatory
regulatory policy
policy decreases
decreases the
the incentives
incentives to
to
develop
develop more
more efficient
efficient abatement
abatement technologies.
technologies.
MARKET EFFECTS OF REGULATION BY
COMMAND AND CONTROL
Price per ton
Supply Curve with
of paper $$
regulation
f
74
Initial Supply
i
60
Demand
70
100
Tons of paper per day
COMMAND AND CONTROL
REGULATION
• The mandated technology will be
less efficient and more costly than
the technology developed under a
pollution tax;
• The supply shift resulting from the
regulatory policy will be larger than
the supply shift from the pollution
tax.
COMMAND AND CONTROL
REGULATION
•
•
•
Everyone will be unhappy with command
and control policy:
Consumers will be unhappy because the
price is higher ($74 instead of $68);
Firms will be unhappy because there is
less paper (70 tons per day instead of 80
with the tax).
Environmentalists will be unhappy because
there is more pollution (280 gallons per day
instead of 240).
ADVANTAGES
ADVANTAGES OF
OF POLLUTION
POLLUTION TAX
TAX AND
AND
COMMAND
COMMAND AND
AND CONTROL
CONTROL POLICY
POLICY
POLLUTION
POLLUTION TAX
TAX COMMAND
COMMAND &
& CONTROL
CONTROL
•• The
The money
money raised
raised from
from •• The
The policy
policy specifies
specifies
pollution
how
pollution tax
tax could
could be
be
how much
much waste
waste each
each
used
firm
used to
to cut
cut other
other taxes
taxes
firm can
can produce,
produce, so
so
or
or increase
increase spending
spending on
on we
we can
can predict
predict the
the
public
total
public programs
programs
total volume
volume of
of waste
waste
MARKETABLE POLLUTION
PERMITS
The government picks a target
pollution level for a particular area,
issues just enough pollution permits to
meet the pollution target, and allows
firms to buy and sell the permits.
The key innovation is that these
permits are marketable.
MARKETABLE POLLUTION
PERMITS
PAPER INDUSTRY EXAMPLE:
1.There are 100 paper mills in the market,
each producing 1 ton of paper per day and
initially generate 5 gallons of waste per
day;
2. Half the paper mills can abate the pollution
at a relatively low cost;
3. Half the paper mills have relatively high
abatement costs.
ABATEMENT COSTS: LOW-COST
VERSUS HIGH-COST FIRM
Waste
Waste Production
Production cost
cost Production
Production cost
cost per
per
Ton
per
per
Ton
per Ton:
Ton:
per Ton:
Ton: (gallons)
(gallons)
Low
High
Low Cost
Cost
High Cost
Cost
55
$60
$60
$60
$60
44
$61
$67
$61
$67
33
$64
$82
$64
$82
22
$71
$112
$71
$112
11
$86
$172
$86
$172
00
$116
$300
$116
$300
ABATEMENT COST: LOW-COST
VERSUS HIGH-COST FIRM
•
•
•
Suppose government decides to decrease
the volume of waste to 400 gallons per day:
The government issues 4 marketable
permits to each of the 100 paper firms;
If a particular firm wants to generate 5
gallons of waste per day, it can buy a fifth
permit;
The firm that sells one of its permits can
only generate 3 gallons of waste per day.
ABATEMENT COST: LOW-COST
VERSUS HIGH-COST FIRM
Each low-cost firm will sell a permit to
a high-cost firm:
1.
1. Each
Each high-cost
high-cost firm
firm is
is willing
willing to
to pay
pay up
up to
to $7
$7 for
for aa
permit.
permit. If
If aa high-cost
high-cost firm
firm gets
gets aa fifth
fifth permit,
permit, it
it
can
can generate
generate 55 gallons
gallons of
of waste
waste and
and produce
produce aa ton
ton
of
of paper
paper for
for $60
$60 instead
instead of
of $67
$67 with
with four
four permits;
permits;
2.
2. Each
Each low-cost
low-cost firm
firm is
is willing
willing to
to accept
accept any
any
amount
amount above
above $3,
$3, since
since if
if low-cost
low-cost firm
firm gives
gives up
up
one
one permit,
permit, it
it can
can generate
generate only
only 33 gallons
gallons of
of
waste.
waste. Its
Its production
production cost
cost would
would increase
increase by
by $3
$3
(from
(from $61
$61 to
to $64).
$64).
DIFFERENCES
DIFFERENCES IN
IN TOTAL
TOTAL ABATEMENT
ABATEMENT COSTS
COSTS
Gallons
Gallons
Abated
Abated
High-Cost
High-Cost Firms
Firms Low-Cost
Low-Cost Firms
Firms Total
Total
100
Without
Without 100
With
With
Abatement
Abatement Costs
Costs
0
$200 $200 Trading
Trading
$350 $50
$400 Trading
Trading
DIFFERENCES
DIFFERENCES IN
IN TOTAL
TOTAL ABATEMENT
ABATEMENT COSTS
COSTS
With
With Trading
Trading
•• Each
Each high-cost
high-cost firm
firm will
will generate
generate 55 gallons
gallons of
of waste
waste and
and
spend
spend nothing
nothing on
on pollution
pollution abatement;
abatement;
•• Each
Each low-cost
low-cost firm
firm will
will generate
generate 33 gallons
gallons of
of waste
waste and
and
incur
incur an
an abatement
abatement cost
cost of
of $4
$4 ($64
($64 -- $60);
$60);
•• Total
Total cost
cost of
of cutting
cutting from
from 500
500 to
to 400
400 gallons
gallons waste
waste is
is $200.
$200.
Without
Without Trading
Trading
•• Each
Each high-cost
high-cost firm
firm incurs
incurs $7
$7 to
to abate
abate 11 gallon
gallon of
of waste:
waste:
production
production cost
cost increases
increases from
from $60
$60 to
to $67.
$67. With
With 50
50 highhighcost
cost firms,
firms, total
total abatement
abatement cost
cost is
is $350
$350 for
for these
these firms;
firms;
•• Each
Each low-cost
low-cost firm
firm incurs
incurs $1
$1 to
to abate
abate 11 gallon
gallon of
of waste:
waste:
production
production cost
cost increases
increases from
from $60
$60 to
to $61.
$61. With
With 50
50 lowlowcost
cost firms,
firms, total
total abatement
abatement cost
cost for
for these
these firms
firms is
is $50.
$50.
•• The
The total
total cost
cost under
under traditional
traditional permit
permit policy
policy is
is $400.
$400.
EXAMPLES OF MARKETABLE
PERMIT EXCHANGES
WHOPAID TO WHOM TO DUMP
Duquesne
Duquesne $3,750,000
$3,750,000 Wisconsin
Wisconsin Power
Power 15,000
15,000 tons
tons of
of
Light
sulfur
Light Co.
Co. ($250
($250 // ton)
ton) and
and Light
Light
sulfur dioxide
dioxide
Mobil
Mobil Oil
Oil $3,000,000
$3,000,000 Torrence,
Torrence, CA
CA 900
900 pounds
pounds of
of Corp.
Corp.
(earlier
from
(earlier rights
rights reactive
reactive vapors
vapors
from
GM)
per
GM)
per day
day
•• Another
Another example
example is
is aa firm
firm in
in Los
Los Angeles
Angeles which
which
installed
installed aa new
new incinerator
incinerator that
that decreased
decreased
hydrocarbon
hydrocarbon emissions
emissions by
by 100
100 tons
tons per
per year
year and
and
offered
offered to
to sell
sell the
the rights
rights to
to emit
emit 100
100 tons
tons of
of
hydrocarbons
hydrocarbons for
for $400,000.
$400,000.
GLOBAL WARMING
• Solar energy comes through the
atmosphere and heats the air near the
earth’s surface.
• Certain types of gases in the atmosphere
(called greenhouse gases) trap the heat
close to the earth’s surface.
• Unfortunately, we are pumping more of
these greenhouse gases into the
atmosphere, so the earth’s temperature is
increasing.
HOW DOES DESTRUCTION OF
TROPICAL RAIN FORESTS AFFECT
GLOBAL WARMING ?
1. If trees and plants are burned to clear
the land, the carbon stored in these
plants is converted into carbon
dioxide.
2. Once the forest is cleared, there is
less plant material to convert carbon
dioxide into stored carbon.
EFFECTS OF GLOBAL WARMING
• Total rainfall will increase, with some areas
getting more and others getting less;
• Increased carbon dioxide will make all
plants (including weeds) grow faster;
• Net effect on agriculture is likely to be
negative: expect less rainfall in areas with
fertile soil and more in areas with less
fertile soil;
• Increasing global temperatures will melt
glaciers and polar ice caps, increasing sea
levels.
CARBON TAX
• Economist’s response to global warming is
a tax on fossil fuels;
• Tax would force people who use fossil
fuels to pay the full cost (spillover cost) of
using them;
• spillover cost of a particular fuel depends
on how much carbon dioxide is released
into the atmosphere;
• Carbon tax for a particular fuel would be
determined by the fuel’s carbon content.
MARKET EFFECTS OF CARBON TAX ON COAL
Supply Curve with
carbon tax
Price per ton
of paper $$
t
42
Initial Supply
i
35
Demand
78
100
Tons of Coal per day
EFFECTS
EFFECTS OF
OF DIFFERENT
DIFFERENT CARBON
CARBON TAXES
TAXES
low
low tax
tax
high
high tax
tax
Tax
$5.00
$100.00
Tax per
per ton
ton of
of carbon
carbon
$5.00
$100.00
Effect
Effect on
on price
price of
of coal
coal
Tax
$3.50
$70.0
Tax per
per ton
ton
$3.50
$70.0
Percentage
10
205
Percentage increase
increase
10 %
%
205 %
%
Effect
Effect on
on price
price of
of oil
oil
Tax
$0.58
$11.65
Tax per
per barrel
barrel
$0.58
$11.65
Percentage
2.8
55
Percentage increase
increase
2.8 %
%
55 %
%
Effect
Effect on
on price
price of
of gasoline
gasoline
Tax
$0.014
Tax per
per gallon
gallon
$0.014 $0.28
$0.28
Percentage
1.2
23
Percentage increase
increase
1.2 %
%
23 %
%
Percentage
10
43
greenhouse
Percentage reduction
reduction in
in
10 %
%
43 %
%
greenhouse
emissions
emissions
Total
Total tax
tax revenue
revenue per
per year
year $10
$10 billion
billion $125
$125 billion
billion
OZONE DEPLETION
•• A
A layer
layer of
of ozone
ozone in
in the
the upper
upper atmosphere
atmosphere prevents
prevents most
most of
of
the
the sun’s
sun’s harmful
harmful ultraviolet
ultraviolet light
light from
from reaching
reaching the
the
surface
surface of
of the
the earth;
earth;
•• Ultraviolet
Ultraviolet light
light causes
causes living
living cells
cells to
to mutate,
mutate, causing
causing
–– skin
skin cancer,
cancer,
–– eye
eye disease,
disease,
–– death
death of
of marine
marine organisms;
organisms;
•• Chlorofluorocarbons
Chlorofluorocarbons (CFCs),
(CFCs), used
used in
in refrigeration,
refrigeration, air
air
conditioning,
conditioning, spray
spray products,
products, etc...,
etc..., were
were the
the culprit;
culprit;
•• The
The nations
nations of
of the
the world
world have
have agreed
agreed to
to stop
stop producing
producing
CFCs
CFCs altogether;
altogether;
•• The
The ban
ban on
on CFCs
CFCs will
will increase
increase the
the equilibrium
equilibrium prices
prices of
of
the
the goods
goods that
that were
were produced
produced with
with these
these chemicals.
chemicals.
ACID RAIN
•• sulfur-dioxide
sulfur-dioxide emissions
emissions of
of coal-burning
coal-burning power
power
plants
plants combined
combined with
with nitrogen
nitrogen oxides
oxides and
and other
other
chemicals
chemicals in
in the
the atmosphere
atmosphere to
to form
form acid
acid rain;
rain;
•• Rainfall
Rainfall downwind
downwind from
from the
the power
power plants
plants changed
changed
soil
soil and
and water
water acidity,
acidity, causing
causing problems
problems for
for trees,
trees,
fish,
fish, and
and other
other aquatic
aquatic life;
life;
•• The
The Clean
Clean Air
Air Act
Act of
of 1990
1990 established
established aa system
system of
of
marketable
marketable pollution
pollution permits
permits for
for sulfur
sulfur dioxide:
dioxide:
–– Each
Each utility
utility will
will receive
receive enough
enough permits
permits to
to
generate
generate 30%
30% to
to 50%
50% of
of the
the sulfur
sulfur dioxide
dioxide it
it had
had
produced
produced 10
10 years
years earlier;
earlier;
–– The
The permit
permit system
system will
will decrease
decrease sulfur
sulfur dioxide
dioxide
emissions
emissions by
by 10
10 million
million tons
tons per
per year.
year.
URBAN SMOG
•• The
The result
result of
of mixing
mixing several
several pollutants,
pollutants, including
including
nitrogen
nitrogen oxides,
oxides, sulfur
sulfur dioxide,
dioxide, and
and volatile
volatile
organic
organic compounds
compounds --- ground-level
ground-level ozone;
ozone;
•• Smog
Smog causes
causes health
health problems
problems in
in human
human beings
beings
and
and other
other animals,
animals, retards
retards plant
plant growth
growth and
and
decreases
decreases agricultural
agricultural productivity;
productivity;
•• The
The automobile
automobile is
is the
the most
most important
important source
source of
of
the
the pollutants
pollutants that
that lead
lead to
to smog;
smog;
•• The
The Environmental
Environmental Protection
Protection Agency
Agency currently
currently
uses
uses aa command-and-control
command-and-control approach
approach to
to
regulate
regulate automobile
automobile pollution;
pollution;
•• An
An alternative
alternative to
to the
the EPA
EPA policy
policy is
is to
to levy
levy an
an
annual
annual pollution
pollution tax
tax on
on each
each car.
car.
Using the paper market as an example:
• Paper mills generate chemical wastes as
part of their production process and dump
some of these wastes into rivers.
• If a city downstream was required to treat
the river water to make it safe for drinking,
it might impose a pollution tax to cover the
cost of additional water treatment.
POLLUTION TAX
• The paper market is a market that
generates spillover costs.
• Another word for spillover cost is
external cost.
• A pollution tax internalizes the
externality.
• If the firm pays $4 per gallon of waste,
the cost of polluting the river is
internal to the firm, not external.
FIRM’S RESPONSE TO
POLLUTION TAX
• Most polluting firms can control the
amount of polluting waste they dump
into the environment;
• As a firm continues to decrease waste,
it becomes progressively more
expensive to do so.
COST
COST PER
PER TON
TON OF
OF PAPER
PAPER WITH
WITH VARYING
VARYING
AMOUNTS
AMOUNTS OF
OF POLLUTION
POLLUTION
Waste
Waste
ton
ton
55
44
33
22
11
00
Production
Production Cost
Cost Tax
Tax Cost
Cost Total
Total Cost
Cost per
per
per
per ton
ton per
per ton
ton per
per ton
ton
$60
$20
$80
$60
$20
$80
$61
$16
$77
$61
$16
$77
$64
$12
$76
$64
$12
$76
$71
$8
$79
$71
$8
$79
$86
$4
$90
$86
$4
$90
$116
$0
$116
$116
$0
$116
COST PER TON OF PAPER WITH VARYING
AMOUNTS OF POLLUTION
Waste Production Cost Tax Cost Total Cost
per ton per ton per ton
5
$60
$20
$80
4
$61
$16
$77
3
2
1
0
$64
$71
$86
$116
$12
$8
$4
$0
$76
$79
$90
$116
per ton
MARGINAL PRINCIPLE
Increase the level of activity if its
marginal benefit exceeds its marginal
cost, but reduce the level if the
marginal cost exceeds the marginal
benefit. If possible pick the level at
which the marginal benefit equals the
marginal cost.
MARKET EFFECTS OF A POLLUTION
TAX
•• The
The original
original price
price of
of $60
$60 just
just covered
covered the
the cost
cost of
of
producing
producing paper
paper without
without the
the pollution
pollution tax;
tax;
•• The
The tax
tax increases
increases the
the cost
cost of
of producing
producing paper
paper
because
because the
the typical
typical firm
firm pays
pays some
some pollution
pollution tax
tax
and
and incurs
incurs some
some costs
costs when
when it
it cuts
cuts back
back its
its
pollution;
pollution;
•• Since
Since old
old price
price is
is not
not high
high enough
enough to
to cover
cover higher
higher
production
production costs,
costs, some
some firms
firms leave
leave the
the market;
market;
•• The
The supply
supply curve
curve shifts
shifts left:
left: at
at each
each price
price aa
smaller
smaller quantity
quantity of
of paper
paper will
will be
be supplied;
supplied;
•• The
The leftward
leftward shift
shift of
of the
the supply
supply curve
curve increases
increases
the
the equilibrium
equilibrium price
price of
of paper
paper (point
(point ii to
to point
point f).
f).
MARKET EFFECTS OF A POLLUTION TAX
Price per ton
of paper $$
Supply Curve with $4
pollution tax
f
68
60
i
Initial Supply
Demand
80
100
Tons of paper per day
MARKET EFFECTS OF A
POLLUTION TAX
• Like other taxes, a pollution tax is
partially shifted to consumers in the
form of a higher price;
• When consumers face the full cost of
producing paper, they decide to
consume less of it.
THE MARKET EFFECTS OF A POLLUTION
TAX
How does the pollution tax affect the
volume of waste dumped into the river ?
1. Abatement
There
There is
is less
less waste
waste per
per ton
ton of
of paper
paper (3
(3 gallons
gallons
instead
instead of
of 55 ).
).
2. Lower Output
The
The industry
industry produces
produces less
less paper
paper (only
(only 80
80 tons
tons
per
per day
day instead
instead of
of 100).
100).
COMMAND AND CONTROL
REGULATION POLICY
The government commands each
firm to produce no more than a
certain volume of pollution and
controls the firm’s production
process by forcing the firm to use
a particular pollution-control
technology.
COMMAND AND CONTROL
REGULATION POLICY
The mandated abatement technology
is unlikely to be the most efficient
technology for two reasons:
•• The
The regulatory
regulatory policy
policy specifies
specifies aa single
single abatement
abatement
technology
technology for
for all
all firms;
firms; while
while efficient
efficient for
for one
one
firm,
firm, this
this may
may not
not be
be efficient
efficient for
for others.
others.
•• The
The regulatory
regulatory policy
policy decreases
decreases the
the incentives
incentives to
to
develop
develop more
more efficient
efficient abatement
abatement technologies.
technologies.
MARKET EFFECTS OF REGULATION BY
COMMAND AND CONTROL
Price per ton
Supply Curve with
of paper $$
regulation
f
74
Initial Supply
i
60
Demand
70
100
Tons of paper per day
COMMAND AND CONTROL
REGULATION
• The mandated technology will be
less efficient and more costly than
the technology developed under a
pollution tax;
• The supply shift resulting from the
regulatory policy will be larger than
the supply shift from the pollution
tax.
COMMAND AND CONTROL
REGULATION
•
•
•
Everyone will be unhappy with command
and control policy:
Consumers will be unhappy because the
price is higher ($74 instead of $68);
Firms will be unhappy because there is
less paper (70 tons per day instead of 80
with the tax).
Environmentalists will be unhappy because
there is more pollution (280 gallons per day
instead of 240).
ADVANTAGES
ADVANTAGES OF
OF POLLUTION
POLLUTION TAX
TAX AND
AND
COMMAND
COMMAND AND
AND CONTROL
CONTROL POLICY
POLICY
POLLUTION
POLLUTION TAX
TAX COMMAND
COMMAND &
& CONTROL
CONTROL
•• The
The money
money raised
raised from
from •• The
The policy
policy specifies
specifies
pollution
how
pollution tax
tax could
could be
be
how much
much waste
waste each
each
used
firm
used to
to cut
cut other
other taxes
taxes
firm can
can produce,
produce, so
so
or
or increase
increase spending
spending on
on we
we can
can predict
predict the
the
public
total
public programs
programs
total volume
volume of
of waste
waste
MARKETABLE POLLUTION
PERMITS
The government picks a target
pollution level for a particular area,
issues just enough pollution permits to
meet the pollution target, and allows
firms to buy and sell the permits.
The key innovation is that these
permits are marketable.
MARKETABLE POLLUTION
PERMITS
PAPER INDUSTRY EXAMPLE:
1.There are 100 paper mills in the market,
each producing 1 ton of paper per day and
initially generate 5 gallons of waste per
day;
2. Half the paper mills can abate the pollution
at a relatively low cost;
3. Half the paper mills have relatively high
abatement costs.
ABATEMENT COSTS: LOW-COST
VERSUS HIGH-COST FIRM
Waste
Waste Production
Production cost
cost Production
Production cost
cost per
per
Ton
per
per
Ton
per Ton:
Ton:
per Ton:
Ton: (gallons)
(gallons)
Low
High
Low Cost
Cost
High Cost
Cost
55
$60
$60
$60
$60
44
$61
$67
$61
$67
33
$64
$82
$64
$82
22
$71
$112
$71
$112
11
$86
$172
$86
$172
00
$116
$300
$116
$300
ABATEMENT COST: LOW-COST
VERSUS HIGH-COST FIRM
•
•
•
Suppose government decides to decrease
the volume of waste to 400 gallons per day:
The government issues 4 marketable
permits to each of the 100 paper firms;
If a particular firm wants to generate 5
gallons of waste per day, it can buy a fifth
permit;
The firm that sells one of its permits can
only generate 3 gallons of waste per day.
ABATEMENT COST: LOW-COST
VERSUS HIGH-COST FIRM
Each low-cost firm will sell a permit to
a high-cost firm:
1.
1. Each
Each high-cost
high-cost firm
firm is
is willing
willing to
to pay
pay up
up to
to $7
$7 for
for aa
permit.
permit. If
If aa high-cost
high-cost firm
firm gets
gets aa fifth
fifth permit,
permit, it
it
can
can generate
generate 55 gallons
gallons of
of waste
waste and
and produce
produce aa ton
ton
of
of paper
paper for
for $60
$60 instead
instead of
of $67
$67 with
with four
four permits;
permits;
2.
2. Each
Each low-cost
low-cost firm
firm is
is willing
willing to
to accept
accept any
any
amount
amount above
above $3,
$3, since
since if
if low-cost
low-cost firm
firm gives
gives up
up
one
one permit,
permit, it
it can
can generate
generate only
only 33 gallons
gallons of
of
waste.
waste. Its
Its production
production cost
cost would
would increase
increase by
by $3
$3
(from
(from $61
$61 to
to $64).
$64).
DIFFERENCES
DIFFERENCES IN
IN TOTAL
TOTAL ABATEMENT
ABATEMENT COSTS
COSTS
Gallons
Gallons
Abated
Abated
High-Cost
High-Cost Firms
Firms Low-Cost
Low-Cost Firms
Firms Total
Total
100
Without
Without 100
With
With
Abatement
Abatement Costs
Costs
0
$200 $200 Trading
Trading
$350 $50
$400 Trading
Trading
DIFFERENCES
DIFFERENCES IN
IN TOTAL
TOTAL ABATEMENT
ABATEMENT COSTS
COSTS
With
With Trading
Trading
•• Each
Each high-cost
high-cost firm
firm will
will generate
generate 55 gallons
gallons of
of waste
waste and
and
spend
spend nothing
nothing on
on pollution
pollution abatement;
abatement;
•• Each
Each low-cost
low-cost firm
firm will
will generate
generate 33 gallons
gallons of
of waste
waste and
and
incur
incur an
an abatement
abatement cost
cost of
of $4
$4 ($64
($64 -- $60);
$60);
•• Total
Total cost
cost of
of cutting
cutting from
from 500
500 to
to 400
400 gallons
gallons waste
waste is
is $200.
$200.
Without
Without Trading
Trading
•• Each
Each high-cost
high-cost firm
firm incurs
incurs $7
$7 to
to abate
abate 11 gallon
gallon of
of waste:
waste:
production
production cost
cost increases
increases from
from $60
$60 to
to $67.
$67. With
With 50
50 highhighcost
cost firms,
firms, total
total abatement
abatement cost
cost is
is $350
$350 for
for these
these firms;
firms;
•• Each
Each low-cost
low-cost firm
firm incurs
incurs $1
$1 to
to abate
abate 11 gallon
gallon of
of waste:
waste:
production
production cost
cost increases
increases from
from $60
$60 to
to $61.
$61. With
With 50
50 lowlowcost
cost firms,
firms, total
total abatement
abatement cost
cost for
for these
these firms
firms is
is $50.
$50.
•• The
The total
total cost
cost under
under traditional
traditional permit
permit policy
policy is
is $400.
$400.
EXAMPLES OF MARKETABLE
PERMIT EXCHANGES
WHOPAID TO WHOM TO DUMP
Duquesne
Duquesne $3,750,000
$3,750,000 Wisconsin
Wisconsin Power
Power 15,000
15,000 tons
tons of
of
Light
sulfur
Light Co.
Co. ($250
($250 // ton)
ton) and
and Light
Light
sulfur dioxide
dioxide
Mobil
Mobil Oil
Oil $3,000,000
$3,000,000 Torrence,
Torrence, CA
CA 900
900 pounds
pounds of
of Corp.
Corp.
(earlier
from
(earlier rights
rights reactive
reactive vapors
vapors
from
GM)
per
GM)
per day
day
•• Another
Another example
example is
is aa firm
firm in
in Los
Los Angeles
Angeles which
which
installed
installed aa new
new incinerator
incinerator that
that decreased
decreased
hydrocarbon
hydrocarbon emissions
emissions by
by 100
100 tons
tons per
per year
year and
and
offered
offered to
to sell
sell the
the rights
rights to
to emit
emit 100
100 tons
tons of
of
hydrocarbons
hydrocarbons for
for $400,000.
$400,000.
GLOBAL WARMING
• Solar energy comes through the
atmosphere and heats the air near the
earth’s surface.
• Certain types of gases in the atmosphere
(called greenhouse gases) trap the heat
close to the earth’s surface.
• Unfortunately, we are pumping more of
these greenhouse gases into the
atmosphere, so the earth’s temperature is
increasing.
HOW DOES DESTRUCTION OF
TROPICAL RAIN FORESTS AFFECT
GLOBAL WARMING ?
1. If trees and plants are burned to clear
the land, the carbon stored in these
plants is converted into carbon
dioxide.
2. Once the forest is cleared, there is
less plant material to convert carbon
dioxide into stored carbon.
EFFECTS OF GLOBAL WARMING
• Total rainfall will increase, with some areas
getting more and others getting less;
• Increased carbon dioxide will make all
plants (including weeds) grow faster;
• Net effect on agriculture is likely to be
negative: expect less rainfall in areas with
fertile soil and more in areas with less
fertile soil;
• Increasing global temperatures will melt
glaciers and polar ice caps, increasing sea
levels.
CARBON TAX
• Economist’s response to global warming is
a tax on fossil fuels;
• Tax would force people who use fossil
fuels to pay the full cost (spillover cost) of
using them;
• spillover cost of a particular fuel depends
on how much carbon dioxide is released
into the atmosphere;
• Carbon tax for a particular fuel would be
determined by the fuel’s carbon content.
MARKET EFFECTS OF CARBON TAX ON COAL
Supply Curve with
carbon tax
Price per ton
of paper $$
t
42
Initial Supply
i
35
Demand
78
100
Tons of Coal per day
EFFECTS
EFFECTS OF
OF DIFFERENT
DIFFERENT CARBON
CARBON TAXES
TAXES
low
low tax
tax
high
high tax
tax
Tax
$5.00
$100.00
Tax per
per ton
ton of
of carbon
carbon
$5.00
$100.00
Effect
Effect on
on price
price of
of coal
coal
Tax
$3.50
$70.0
Tax per
per ton
ton
$3.50
$70.0
Percentage
10
205
Percentage increase
increase
10 %
%
205 %
%
Effect
Effect on
on price
price of
of oil
oil
Tax
$0.58
$11.65
Tax per
per barrel
barrel
$0.58
$11.65
Percentage
2.8
55
Percentage increase
increase
2.8 %
%
55 %
%
Effect
Effect on
on price
price of
of gasoline
gasoline
Tax
$0.014
Tax per
per gallon
gallon
$0.014 $0.28
$0.28
Percentage
1.2
23
Percentage increase
increase
1.2 %
%
23 %
%
Percentage
10
43
greenhouse
Percentage reduction
reduction in
in
10 %
%
43 %
%
greenhouse
emissions
emissions
Total
Total tax
tax revenue
revenue per
per year
year $10
$10 billion
billion $125
$125 billion
billion
OZONE DEPLETION
•• A
A layer
layer of
of ozone
ozone in
in the
the upper
upper atmosphere
atmosphere prevents
prevents most
most of
of
the
the sun’s
sun’s harmful
harmful ultraviolet
ultraviolet light
light from
from reaching
reaching the
the
surface
surface of
of the
the earth;
earth;
•• Ultraviolet
Ultraviolet light
light causes
causes living
living cells
cells to
to mutate,
mutate, causing
causing
–– skin
skin cancer,
cancer,
–– eye
eye disease,
disease,
–– death
death of
of marine
marine organisms;
organisms;
•• Chlorofluorocarbons
Chlorofluorocarbons (CFCs),
(CFCs), used
used in
in refrigeration,
refrigeration, air
air
conditioning,
conditioning, spray
spray products,
products, etc...,
etc..., were
were the
the culprit;
culprit;
•• The
The nations
nations of
of the
the world
world have
have agreed
agreed to
to stop
stop producing
producing
CFCs
CFCs altogether;
altogether;
•• The
The ban
ban on
on CFCs
CFCs will
will increase
increase the
the equilibrium
equilibrium prices
prices of
of
the
the goods
goods that
that were
were produced
produced with
with these
these chemicals.
chemicals.
ACID RAIN
•• sulfur-dioxide
sulfur-dioxide emissions
emissions of
of coal-burning
coal-burning power
power
plants
plants combined
combined with
with nitrogen
nitrogen oxides
oxides and
and other
other
chemicals
chemicals in
in the
the atmosphere
atmosphere to
to form
form acid
acid rain;
rain;
•• Rainfall
Rainfall downwind
downwind from
from the
the power
power plants
plants changed
changed
soil
soil and
and water
water acidity,
acidity, causing
causing problems
problems for
for trees,
trees,
fish,
fish, and
and other
other aquatic
aquatic life;
life;
•• The
The Clean
Clean Air
Air Act
Act of
of 1990
1990 established
established aa system
system of
of
marketable
marketable pollution
pollution permits
permits for
for sulfur
sulfur dioxide:
dioxide:
–– Each
Each utility
utility will
will receive
receive enough
enough permits
permits to
to
generate
generate 30%
30% to
to 50%
50% of
of the
the sulfur
sulfur dioxide
dioxide it
it had
had
produced
produced 10
10 years
years earlier;
earlier;
–– The
The permit
permit system
system will
will decrease
decrease sulfur
sulfur dioxide
dioxide
emissions
emissions by
by 10
10 million
million tons
tons per
per year.
year.
URBAN SMOG
•• The
The result
result of
of mixing
mixing several
several pollutants,
pollutants, including
including
nitrogen
nitrogen oxides,
oxides, sulfur
sulfur dioxide,
dioxide, and
and volatile
volatile
organic
organic compounds
compounds --- ground-level
ground-level ozone;
ozone;
•• Smog
Smog causes
causes health
health problems
problems in
in human
human beings
beings
and
and other
other animals,
animals, retards
retards plant
plant growth
growth and
and
decreases
decreases agricultural
agricultural productivity;
productivity;
•• The
The automobile
automobile is
is the
the most
most important
important source
source of
of
the
the pollutants
pollutants that
that lead
lead to
to smog;
smog;
•• The
The Environmental
Environmental Protection
Protection Agency
Agency currently
currently
uses
uses aa command-and-control
command-and-control approach
approach to
to
regulate
regulate automobile
automobile pollution;
pollution;
•• An
An alternative
alternative to
to the
the EPA
EPA policy
policy is
is to
to levy
levy an
an
annual
annual pollution
pollution tax
tax on
on each
each car.
car.