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    Marginal Cost-Benefit

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    1) When negative pollution externalities exist in competitive markets, too much of the polluting good is produced, resulting in a deadweight loss to society. The market equilibrium is not socially efficient. 2) The marginal damage (MD) curve shows the change in damages from increased pollution, while the marginal abatement cost (MAC) curve shows the change in costs from reducing pollution. 3) The socially efficient level of pollution minimizes total social costs by setting MAC equal to MD, whereas competitive markets produce at the higher pollution level where MAC is zero. This causes additional damages represented by the area C.

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    Marginal Cost-Benefit

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    1) When negative pollution externalities exist in competitive markets, too much of the polluting good is produced, resulting in a deadweight loss to society. The market equilibrium is not socially efficient. 2) The marginal damage (MD) curve shows the change in damages from increased pollution, while the marginal abatement cost (MAC) curve shows the change in costs from reducing pollution. 3) The socially efficient level of pollution minimizes total social costs by setting MAC equal to MD, whereas competitive markets produce at the higher pollution level where MAC is zero. This causes additional damages represented by the area C.

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    Marginal cost-benefit

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    1) When negative pollution externalities exist in competitive markets, too much of the polluting good is produced, resulting in a deadweight loss to society. The market equilibrium is not socially efficient. 2) The marginal damage (MD) curve shows the change in damages from increased pollution, while the marginal abatement cost (MAC) curve shows the change in costs from reducing pollution. 3) The socially efficient level of pollution minimizes total social costs by setting MAC equal to MD, whereas competitive markets produce at the higher pollution level where MAC is zero. This causes additional damages represented by the area C.

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    192 views12 pages

    Marginal Cost-Benefit

    Uploaded by

    F-10
    1) When negative pollution externalities exist in competitive markets, too much of the polluting good is produced, resulting in a deadweight loss to society. The market equilibrium is not socially efficient. 2) The marginal damage (MD) curve shows the change in damages from increased pollution, while the marginal abatement cost (MAC) curve shows the change in costs from reducing pollution. 3) The socially efficient level of pollution minimizes total social costs by setting MAC equal to MD, whereas competitive markets produce at the higher pollution level where MAC is zero. This causes additional damages represented by the area C.

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    ECON 3755: Environmental Economics Economics of Pollution Reading: Field and Olewiler (2005): Chapter 5.

    Recall our analysis of competitive market failure: So, we have focused on the demand and supply of a polluting good to explain the problems associated with pollution. We identified marginal external costs (MEC) as the problem We said that when a negative pollution externality exists in a competitive economy, the MEC create a market failure: Too much of a polluting good is produced A dead weight loss (DWL) to society is created The equilibrium is not socially efficient Net social value is not maximized

    Production Externality: when the production of a good produces a pollutant, and costs imposed on individuals in society (health/noise/sight/etc) are not considered in the private market exchange Net Social Value:
    MSC At QC: Total Social Benefit = D+E+F+G+H Total Cost = G+H+I Net Social Value = D+E+F-I So, I represents the Dead Weight Loss from producing above Q*.

    P, MWTP, MSC

    MSC

    D Private S E I H F G

    PC =MWTP

    Private D=MWTP Q* QC

    Quantity (Q)

    Consumption Externality: when the consumption of a good produces a pollutant, and costs imposed on individuals in society (health/noise/sight/etc) are not considered in the private market exchange
    P, MWTP, MSC
    Private S=MSC

    Net Social Value:


    At QC: Total Social Benefit = D+E+F+G+H Total Cost = G+H+I Net Social Value = D+E+F-I

    PC =MSC

    D
    E I

    H
    MWTP F G

    Private D

    So, I represents the Dead Weight Loss from producing above Q*.

    MWTP
    Q* QC

    Quantity (Q)

    To analyse pollution problems more precisely, we will now focus on actual levels of pollution: Examine the damages they impose Consider the benefits and costs of reducing them to target levels

    Economics of Pollution Model: (i) The Marginal Damage (MD) Curve We know that as more goods are produced and consumed in the private market, marginal external costs (MEC) increase We can analyze the MEC directly by relating different levels of a pollutant with their associated marginal damages imposed on society A Damage Function relates the quantity of a pollutant (i.e. emissions or ambient concentrations) to the value of its damages.
    Total Damage Total Damage Curve Total

    Example:

    Damage

    CO2 emissions

    A marginal damage (MD) curve shows the change in damages from a unit increase in the pollutant. Total damages are represented by the area under the MD curve up to the quantity of the pollutant produced.
    Total $ Damage A

    Total Damage (TD)

    If the Total Damage Curve is linear, then the Marginal Damage Curve is horizontal

    Example:
    CO2 emissions

    $/CO2

    At X:

    Total Damages =A Total damages (TD) are represented by the Marginal area under the MD Damage (MD) curve up to the quantity of the pollutant produced (area A)

    CO2 emissions

    o Typically, we assume an exponentially increasing Total Damage Curve, so the Marginal Damage Curve is upward sloping.
    Total Damage $

    Total TD Damage

    Example:
    $

    CO2 emissions
    MD

    $MD A CO2 emissions

    (ii) The Marginal Abatement Cost (MAC) Curve: We know producers/consumers will produce/consume goods until their private marginal cost = private marginal benefit If there is no cost for pollution in a competitive economy, polluters will have no incentive to consider external costs Therefore, pollution reduction costs, or abatement costs, will be zero i.e. Polluters will produce a competitive level of pollution (PollC), and there will be no pollution abatement effort If polluters reduced pollution (to say Poll1<PollC), they would accumulate abatement costs. Total Total $ Total Damage Abatement
    Costs

    Abatement Cost Curve (TAC)

    Poll1

    PollC

    CO2 emissions

    A marginal abatement cost (MAC) curve shows the change in abatement cost from a unit decrease in the pollutant. Total abatement costs are represented by the area under the MAC based on the quantity of the pollutant reduced.
    Total $ Abatement Costs Total Abatement Cost Curve (TAC)

    Total If the Total Abatement cost Damage curve is linear, then the
    Marginal Abatement Cost curve is horizontal

    Example:

    $/CO2

    Poll1

    Total abatement costs (TAC) are represented by the area under the C CO2 emissions MAC curve from Poll At X: the initial Marginal Total Damages =A competitive market Abatement level of pollution, Marginal Cost Curve PollC, to the Damage (MAC) (MD) reduced level, Poll1 (area B) CO2 emissions

    o Typically, we assume an exponentially increasing Total Abatement Cost Curve, so the Marginal Abatement Cost Curve is downward sloping.

    Total $ Abatement Costs

    TAC Total Abatement Cost Curve (TAC)

    Total Damage

    Example:

    MAC Poll MAC

    C Poll CO 2 emissions

    $MAC

    Poll1

    PollC

    (iii) The Socially Efficient Level of Pollution: A Socially Efficient level of pollution is one that minimizes the Total Social Costs imposed on society Total Social Costs = Total Damages + Total Abatement Costs Total social costs will be minimized when the marginal damages of pollution equal the marginal costs of pollution abatement In the MAC/MD Framework, a Socially Efficient level of pollution is one that sets: MAC = MD
    $ MAC MD At Poll*: Total Damages = A Total Abatement Costs = B Total Social Costs (TSC*) = A+B

    MAC=MD A B

    In-class exercise: Prove that Poll* minimizes total social costs


    Pollution

    Poll*

    (iv) The Competitive Market Level of Pollution:

    Recall, polluters will set MAC = 0 in a competitive market


    $ MAC MD

    MAC=MD A Poll* B

    At PollC: Total Damages = A+B+C Total Abatement Costs = 0 TSCC = A+B+C Since TSC* = A+B, the DWLC = C

    PollC Pollution

    Any small reduction in pollution from PollC will reduce total social costs, reduce DWL, and bring society closer to the socially efficient level of pollution However, setting Poll = 0 may not be better for society than PollC Here, we would need to estimate the TSC under each scenario and compare

    Comparing the Demand/Supply vs. MAC/MD Frameworks: (production externality)


    $/unit MSC MSCC

    MWTP* = MSC*

    I Private S

    PC =MWTPC Private D=MWTP Q* $/unit QC MD Quantity (Q)

    MDC

    MAC

    MAC*=MD* A MACC Poll* B

    PollC

    Pollution (Poll)

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