Optimal Level of Pollution - Term Paper Example

Abstract This document entails detailed discussions of socially optimal level of pollution. It is described as the level of pollution that would be preferred, when its costs and benefits are wholly accounted for. At this point, the MSB and MSC are equal. The document elaborates how to determine level of pollution given at the interception of MSC and MSB, as well as why zero pollution is not desirable, considering how much benefit may be forfeited. Two events, that is increase in amount of crud per unit of production and when water skiing activity becomes popular are analysed to determine the effect on socially optimal level. Finally the strengths and drawbacks of economic instruments, convectional command, control regulations, and approaches in regulation of industrial pollution are discussed. Keywords: Socially Optimal Level, Crud Emission, Pollution, MSC, MSB, Externalities, Zero Pollution, CAC, EI, Tax, Inefficient Allocation, Efficient Allocation, Consumption, Benefits, Society, Firms, Government, Regulation, Compliance, Environmental Problems, Abatement Cost and Technologies Crud Emissions Environmental health and safety remains a critical issue around the globe. Global organizations, NGO’s, and governmental organizations in collaboration to the communities have dedicated much effort to the polluted environments. However, their efforts in pollution control face several setbacks. These include increase in industries and factories in congested urban areas and others close to large water bodies, as well as poor draining and emission systems that cause huge damage. Chemical processing factories and oil production activities (especially exploitation and refining operation) specifically those in proximity to the oceans, seas, lakes, or other water channels, whether relying on the water sources for their production processes or transport, have negatively contributed to the varying thickness of crud residue on the water bodies. Industrial waste find its way into the water bodies, while the oil wastes cover the water surface over time. Today, it may not be necessarily equivalent to thick water pollutions as the case of Cuyahoga River in Ohio in the1960’s, but the waste emissions into the water bodies are increasingly harming the health of living organisms (Scott, 2011). It is a common problem in India, as a result of the crud emissions consisting of non renewable resources, suspending solid particles, a variety of chemicals, layers of grease and oil, among other toxic substances from manufacturing, processing, and refining factories that end up in the natural water bodies. 1. How to determine the socially optimal level of crud emissions? Production is necessary for economic growth and development, but it does not part way with pollution. In other words, there is a certain level of pollution relevant in any factory’s level of production, provided it is maintained for a sustainable environment. Socially optimal level of crud pollution is given when the marginal social costs and marginal social benefits are equal and the amount of pollution the society would prefer when its general benefits and costs were completely accounted for (“Externalities: Section 1the Economics of Pollution,” n.d.). Before anything, it is essential to realize that pollution in production is an externality that can be tolerable to a certain degree. In this case, crud pollution on the water bodies is a negative externality, which lowers the socially optimal level of production than what the equilibrium market level would provide. Crud emissions are side effects of the factories’ production activities that generate beneficial goods for the society. Production in these factories occurs at a cost; first of all, the private cost of production to the factory (like the cost of raw material and salaries), then the external cost arising from the externality or cost of environmental damages from pollution. Marginal Social Cost (MSC) is the sum of marginal private and external costs, while Marginal Social Benefit (MSB) equals to marginal private benefit plus the externality (“Externalities,” 2013). Where the MSC and MSB curves intersect, the socially optimal level of crud emission is achieved. See figure 1 below. Figure 1. Illustration of socially optimal level of crude emission. Adapted from “Economic efficiency,” by Tutor2u. Copyright 2013 Tutor2u. In the figure above, the upward sloping SMC/MSC illustrates how the marginal cost to the society varies with each additional quantity of crud emission onto the water bodies. The SMB/MSB curve indicates the gain to the society for each additional quantity of pollution. In the context, the SMC curve is the supply curve and SMB is the demand curve, and both intersect at point B, which is the socially optimal level of pollution. At this point, there is production of socially efficient market outcome. I. Why zero pollution is far from good from a society’s perspective Environmental activists reasoning on pollution greatly differs with the economists’ perspective. Every quantity of pollution has an impact on economic performance. Since the firm is out for production, zero pollution is not a reasonable policy because the society would fail to realize the extra benefit of production in the capacity of the existing resources. The reduction of pollution yields several opportunity costs, and considering that crud pollutants are just misplaced resources, it would hence be logical to argue that the society or factories need to pollute at a reasonable level, within the assimilative capacity of the resources. According to Daly, “zero pollution is not preferable to some positive amount of pollution when the goods and services must be forfeited to have less pollution” (2003, p. 23). At zero quantity of pollution, then factories would bear zero production. As the quantity of pollution increases from point zero to the socially optimal level (say point B) in figure 1, an increase in one additional unit of pollution prevention generates benefits that exceed the costs. Zero products may exist to yield zero pollution as an externality. II. The effect on the socially optimal level of pollution (a) When production process increases the amount of crud per unit of output produced In this case, the optimal level of pollution will adjust with respect to the increase in pollution. Each additional amount of crud in producing a unit of output between zero to the socially optimal quantity of pollution (Q*) produced to derive the socially optimal level of output at the intersection of SMC and SMB (A), create a situation where the marginal benefit to the society is higher than the cost. (See figure 2). Figure 2. Illustration of changes in Social optimal level of pollution at an additional output of crud in production. Adopted from “What are Externalities.” by Tutor2u. Copyright 2013 Tutor2u. Further increase in crud per unit of production leads to an inefficient high quantity of pollution. For the factory to increase the pollution by that factor, it means the MSC will exceed the MSB. Considering that the firm is focused on maximizing its profits to attain its private optimum output of products (Q1), which is greater than the social optimum level of production, more pollution would be emitted. The firm maximizes profits to point B, where the private marginal cost is equal to private marginal benefit at emission of Q1. When the pollution (negative production externality) was taken into account, the socially optimal level of pollution was at point A, but when not taken into account, it causes a market failure and changes to private optimal level of pollution at point B. (b) When water skiing on the lake becomes more popular This event creates the situation of negative consumption externality that occurs when consumers overly consume the services they purchase. The popularity of water skiing would cause negative external effects or pollution that would affect other users of the lake for their activities. Figure 3. Illustration of negative consumption externality. Adopted from “What are Externalities.” by Tutor2u. Copyright 2013 Tutor2u. Suppose those carrying out skiing activities only take into account their own private benefits and costs, it would lead to over exploitation of the lake, where the MPB of skiing is greater than MSB. When there is no intervention to prevent the over skiing consumption, the overall social benefit of consumption reduces due to the consumers’ dissatisfaction (“what are the externalities” n.d.). Before the skiing popularity, social optimal level of pollution (A) is achieved at social optimal quantity of pollution (Q*) (see figure 3). In a free market economy, the consumers disregard the external costs to others, to facilitate their maximized private benefit at private optimal level of pollution at point B. Consumers choose to consume water skiing at the quantity of pollution Q1, w here resources are overly allocated in the event skiing become popular. 2. The benefits and weaknesses of using (a) Conventional command and control regulation to regulate industrial pollution The Command and Control regulation (CAC) is a regulatory approach to environmental pollution that essentially relies on law to enforce compliance as a way of forcing behavioural changes of polluting firms. According to Smith, using CAC regulations the government agencies instruct the polluters to set limits on their polluting emissions, or use a certain production method or pollution control equipment to reduce emissions (2011). CAC comes with several benefits in solving environmental pollution. Strengths: CAC uses its legal authority to restrict potential or existing pollutants, whose later effect can cause intolerable damage, more than its economic impacts. First, it is preferred in cases of highly toxic pollutants, whose impacts exceed the economic concern in the activity. Firms may venture into production without proper methods of disposing their waste. Though their aim is maximizing profits, their content of their emission in production however great or small, may have substantial negative effects on the society than economists or environmentalist would need to redirect their attention on its economic gains. The releases of such toxic substances are prevented through laws and their requirements, which are used to monitor compliance. Second, when firms’ pollution is reduced at a standard cost, the approach uses a fair mechanism to require equal reduction of pollution. According to Econport, when the marginal abatement cost curves of all firms in the regulated industry are uniform, the approach is preferred (2006). Rather than wait for pollution problems to deteriorate, CAC can be easily deployed through the pollution abatement technologies. Lyon argues that they are not only quicker at attacking pollution problems, but also better at locking in environmental problems (2004). It’s a fair choice when the first reduction provides substantial benefit to the society than any further continued reduction. Weaknesses: Different firms have varying externality problems and as a result, their cost structures may end up being different. Hence using a similar standard or technique to reduce pollution across all the firms has varying impacts on their economic efficiencies. The polluting firms lack a proper incentive to explore other technological changes to allow firms the flexibility of finding the most cost effective way of reducing the demand of emission in production (“Alternatives,” n.d.). Second, CAC are just rules and sometimes unless the enforcers take time to monitor for compliance, they fail to implement the purpose. As more problems evolve, changes to the regulations may need to be conducted, which may take extra time or complicate the existing ones. Thirdly, the regulations can pose a problem of unequal treatments, where it splits the responsibilities of reducing pollution across the polluting emitters (Econport, 2006). This occurs due to inefficient allocation of resources that generates dissimilar marginal benefits of emissions for polluting firms. Lastly, the regulation and compliance costs may act as barriers of entry of small scale producers to the industry due to the high cost. The abatement capital could directly favour the large producer, despite the quantity of emissions they generate. (b) Economic instruments (EI) such as emissions taxes or emissions trading schemes (ETS) Benefits: Its one outstanding advantage comes with the flexibilities in selecting their abatement technologies that give them financial incentives. Instead of being forced to apply a certain technology, EI instruments allow polluters to decide on what abatement technologies they would choose, which is cost effective given their individual circumstances (Blackman and Harrington, 1998). Due to the associated financial incentives to the polluters that use economic incentives programs in reducing pollution, each polluting firm or consumer would desire to increase their profits in future, and hence seek more innovative technologies to further reduce their emissions. The program provides continuing incentives for technology innovation and diffusion for reducing emission (UNESCAP, 2003). Third, the society benefits from the low marginal social costs on their side, government benefits from collection of taxes, and can finance other pollution control functions, especially where the taxes are raised with increase in each unit of emission, while the pollution is kept minimal. Fourth, Helmer and Hespenhol, state that the EI reduce the administrative and compliance costs for the industry and government (1997). The reduced costs encourage new producers’ entry into the industry, while supporting the expansion of existing ones, or in accommodating any further changes. Weaknesses: EI is associated with risks of uncertainties that may generate costly effects. Chances are that the amount of pollution the individual polluters opt to reduce as a result of their decisions in response to the tax incentive provided may be less or more than it was visualized in the setting of the tax rate (Zou, 1998). In other words, the pollution outcome and the costs of abatement may not be realistic as time progresses, since value also changes. The impact of their environmental quality may be difficult to predict, in the diversity of the chosen technologies opted as a solution to the polluters. Second, the environmental taxes and charges may inflict financial pressures internally and externally. As the tax burden becomes heavy, it not only affects the polluters, but the factors that depend on them as well (e.g. household and income on the consumers’ side) (OECD, 1997). Development on the part of the polluting firms may be hampered, and the effect of the tax distribution may be felt on household incomes upon regression, especially when the demand for the good is inelastic. Sometimes chances of violating some socially driven laws using EI can also occur. Reference List Alternatives in Pollution Control. (n.d.). Retrieved from http://www.web-books.com/eLibrary/ON/B0/B63/091MB63.html Blackman, A. & Harrington, W. (1998, March). Using Alternative Regulatory Instruments to Control Fixed Point Air Pollution in Developing Countries: Lessons from International Experience. Retrieved from http://ageconsearch.umn.edu/bitstream/10689/1/dp980021.pdf Daly, J. (2003). Ch. 30: Market Failure Externalities, Public Goods and Asymmetric Information. Retrieved from http://www.swlearning.com/economics/arnold/arnold6e/.../market_failure.ppt‎ Economic Efficiency. (n.d.). Retrieved from http://www.tutor2u.net/economics/content/topics/competition/efficiency.htm Econport. (2006). Benefits and Drawbacks. Retrieved from http://www.econport.org/content/handbook/Environmental/pollution-control-revised/Traditional-Pollution-Techniques/Traditional-methods-sub-page.html Externalities. (2013). Retrieved from http://www.s-cool.co.uk/a-level/economics/market-failure/revise-it/externalities Externalities: Section 1the Economics of Pollution. (n.d.). Retrieved from http://www.colorado.edu/economics/morey/2010/2010BookChapters/KW_Chapter19/KW19_1_economics_of_pollution_Edward.pdf Helmer, R. & Hespenhol, I. (1997). Water Pollution Control - A Guide to the Use of Water Quality Management Principles: Chapter 6-Economic Instruments. Retrieved from http://www.who.int/water_sanitation_health/resourcesquality/wpcchap6.pdf Lyon, T. P. (2004). Corporate Environmentalism and Public Policy. New York: Cambridge university press. OECD. (1997). Evaluating Economic Instruments for Environmental Policy. Paris: OECD Publishing Scott, M. (2011 March, 7). Cuyahoga River Fire 40 Years ago ignited an ongoing Cleanup Campaign. Retrieved from http://www.cleveland.com/science/index.ssf/2009/06/cuyahoga_river_fire_40_years_a.html  Smith, S. (2011). Environmental Economics: A Very Short Introduction. New York: Oxford Press University. UNESCAP (2003 December, 11). A. Role of Various Environment- Related Measures: Market based Instruments. Retrieved from http://www.unescap.org/drpad/vc/orientation/M5_3.htm What are externalities? (n.d.). Retrieved from http://www.tutor2u.net/economics/content/topics/externalities/what_are_externalities.htm Zou, D. (1998, November). The Application of Economic Instruments for Preventing and Controlling the Industrial Pollution in China. Retrieved from http://www.lumes.lu.se/database/alumni/97.98/theses/zou_daozhong.pdf Read More