The Socially Efficient Level of Pollution

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The Socially Efficient Level of Pollution

For a particular pollutant being released at a particular time and place, the socially efficient level of emissions or pollution is determined or found where the marginal abatement cost (MAC) function and marginal damage (MD) function are equated. This equilibrium concept can be illustrated algebraically and graphically.

E represents the level of emissions while E* represent the socially efficient level of emissions. Assume that both the MD and MAC are linear. Let:

MD = 2E

MAC = 60 – 4E

Social efficiency requires that MAC is equal to MD. As such, substitute if for MD and MAC

60 – 4E = 2E

E* = 10 tons

In order to determine the price (marginal damage, marginal cost) that equates the two curves, that is, MD and MAC, substitute E* back into either the MD or MAC.

60 – 4(10) = $20

The socially efficient equilibrium is determined where the MD curve and the MAC curve intersect. This equilibrium occurs at E* = 10 tons of pollution. The area represented by (a+ b + c) is equal to the total damages of the initial emission or pollution level of 15 tons. At point E*, the total damages are equal to the area a for a net gain of the sum of the areas b and c. Moreover, at the same point E*, the total abasement costs equals the area b. Thus, the net social gain or benefit is areas (b + c) minus area b = area c (b + c = c).

The Socially Efficient Level of Pollution

Question 1 (b)

E* is the social efficient level of pollution. However, why is it socially efficient? Social efficiency refers to trading off a marginal increase in pollution damages against a marginal increase in pollution enforcement or abatement costs. This means that higher levels of emissions or pollution expose the society to greater costs that emanate from environmental damages. However, lower emissions or levels of pollution involve the society in greater costs in the form of resources devoted to abatement or enforcement activities. Thus, the socially efficient level of effluent is whereby the two types of costs offset each other, that is, where the marginal damage costs equal the marginal abatement costs. The socially efficient level is not always positive. In a situation whereby the MAC and MD do not intersect at a positive level of emissions or pollution, the socially efficient level of pollution will be zero. It is the shapes and slopes of the MD and MAC curves that determine the equilibrium.

Question 1 (c)The Socially Efficient Level of Pollution

The MAC-MD enables people to examine a vast array of cases, especially when enforcement costs are introduced. Ever pollution problem is different. The MAC-MD model of analysis provides a generalized way of presenting the problem that has to be adapted to the specifics of a particular case of environmental pollution. The levels of emissions or pollution that were efficient in the last decade or last year are not necessarily the levels that are efficient today or even in the future. Thus, many factors lie behind the marginal abatement cost function and marginal damage function which will cause a shift in E*. E* is the level that balances the damage costs and the enforcement costs. This level is presented as a desirable target for public policy. This does not mean that with the introduction of enforcement costs the actual economy will be at E*. This is unlikely with certain government interventions such as the mentioned enforcement costs. Thus, unless persuades to contemplate the damage they inflict on the society, polluters will have no incentives to incur enforcement costs. The outcome will be polluters producing at maximum pollution levels.

Question 2 The Socially Efficient Level of Pollution

The objectives of the Paris Agreement is to fortify the global response to the threat of climate change by maintaining a global temperature rise below two degrees Celsius above pre-industrial levels in this century and to pursue efforts to limiting the increase in temperature even further to 1.5 degrees Celsius. Moreover, the Paris Agreement aims to strengthen the ability of nations to deal with the effects of climate change. To achieve themes objectives, a novel technology network, proper financial flows and an enhanced capacity building framework will be put in place to support actions by developing nations, as well as, vulnerable countries, in alignment with their own national goals. There are various elements or requirements of the Paris Agreement to bridge today’s policies and climate-neutrality within the 21st century. For instance, governments agreed to and are required to reduce global emissions, track progress toward the long-term objective through a robust accountability and transparency system, provide enhanced and continued international support for adaptation to developing and vulnerable nations and acknowledge the prominence of avoiding, minimizing and addressing loss and damage associated with the adverse impacts of climate change. Moreover, developed nations are required to provide continued climate action support to decrease emissions and build resilience to climate change effects in developing nations.

Question 3 The Socially Efficient Level of Pollution

Free Market Environmentalism’s premise of wealthier is healthier means that the markets generate the wealth that gives people the ability and financial support to solve environmental problems. Albeit immense individuals mistakenly reckon that markets can only generate consumerism, in reality it is the marts that produce sufficient wealth to help the environment. The second premise of incentives matter means that positive incentives can alter the environment from a position of liability to an asset for a resource owner. Thus, if people own land and water, they have the incentive to conserve and manage them properly. Through Free Market Environmentalism, it is being demonstrated more and more that markets can help the conserve the environment by providing financial support in the form of wealth and political solutions enables environmental conservation policies associated with the market to be implemented.

Question 4 The Socially Efficient Level of Pollution

According to Edwards-Jones, Davies and Hussain (2000), ecological economics is an intriguing interdisciplinary field of study that entails a combination of insights from economics, natural sciences and other fields with objective of developing innovative approaches to environmental problems. The field draws on a vast array of analytical perspectives, both conventional and radical, to formulate a more comprehensive discernment of the human eco-system interactions. The book Ecological Economics provides an inclusive introduction to central themes to land use planning, nature conservation, natural resource management, pollution control, as well as, environmental impact evaluation or assessment. Edwards-Jones, Davies and Hussain (2000) emphasize the complementary roles of ethics, economics and ecology in environmental decision-making processes. By reviewing the evolution of prominent concepts in the field of ecology, the authors explore the critical philosophies underlying discordant approaches to environmental problems and outline in detail the specific techniques and tools utilized in these approaches, as well as, how the examples can be applied based on their merits and demerits in different contexts.

 

Question 5

The Equimarginal Principle requires that the total production is distributed among sources so that their marginal costs of production are equalized. This means that in order to minimize the total costs abating pollution by a certain level, one needs to allocate abatement among various sources such that marginal costs of abatement are equalized.

MCa = MCb = across all plants

Quantity of Emission/Pollution Reduction, units MAC of Plant A $ per unit MAC of Plant B $ per unit
1 0.6 0.7
2 0.65 0.75
3 0.7 0.8
4 0.8 1
5 0.9 1.15
6 1 1.35

 

As per the equimarginal principle,

  • If the total targeted reduction of emissions/pollution is ten units, the total cost minimizing allocation of abatement should be units in Plant A and four units Plant B, with MACs of $1 in both plants. Then, verify that any other allocation increases the total cost.
  • If total targeted reduction of emission or pollution is seven units, the total cost minimizing allocation of abatement should be four units in Plant A and three units in Plant B, with MACs of $0.8 in both plants.
  • The cost-effective MAC schedule for the firm can be tabulated for all levels of emission or pollution reduction. If these were the only two plants in the industry that emitted pollutants, the following schedule will be uses as the MAC instead of the MAC of Plant B or Plant A in the MAC-MD model of pollution control.

As long as the marginal costs in the two plants differ from one another, production should be reallocated away from the high-marginal-cost plant and toward the low-marginal-cost plant so as to get a reduction in total cost. In fact, the total costs of producing the units of both plants will be at a minimum only when the marginal costs of the two plants are equal, hence, the equimarginal principle. The goal of the equimarginal principle is to minimize the total cost of producing a certain quantity of output. The objective is realized when production is distributed in such a way as to equalize the marginal costs between the production sources.

Question 6 The Socially Efficient Level of Pollution

Social efficiency is the optimal distribution of resources in the society that takes into account all eternal costs and benefits, as well as, internal costs and benefits. Social efficiency occurs when Marginal Social Cost = Marginal Social Benefit. If a good has a negative externality, that is, it is ignored by people, then in a free market, we tend to get social inefficiency and over-consumption.

In a free market the consumers ignore the external costs of consumption. Thus, the free market equilibrium is Q1 (where Supply = Demand).

Nonetheless, at Q1 the Marginal Social Cost is greater than the Marginal Social Benefit. Hence, by consuming at this point, the cost to society is greater than the benefit. If the output is decreased from Q1 to Q2, the society is in a better position. At Q2, the marginal social cost is equal to the marginal social benefit. This is referred to as being socially efficient.

Notwithstanding, with a positive externality, the benefits to third parties are ignored. The free market equilibrium (Q1) is less than the socially efficient level (Q2) where SMB = SMC.

 

At Q1, the MSB is greater than the MSC. Thus, in this situation, if the output is increased from Q1 to Q2, the addition to social welfare (MSB) is greater than the marginal social cost, hence the net social welfare increases until point Q1 is reached where SMC = SMB.

The Socially Efficient Level of Pollution

Question 7

Individuals’ demand for public goods expresses their marginal willingness to pay, as is so for their demand for a private good. The difference comes in the way in which individual demand curves are aggregated across consumers. This following examples illustrates that.

Contemplate a freshwater lake near two occupied homes. The people use the lake for recreational purposes, but the water quality of the lake is contaminated by fertilizer runoff from farms. The fertilizer causes algae to grow in the lake. This lowers the dissolved oxygen content of the lake and many fish species die. Moreover, the lake is becoming undesirable for swimming. Dissolved oxygen is the indicator of environmental quality and is measured in parts per million (ppm). It is possible to clean the water by having each household buy a compound that neutralizes the fertilizer and improves dissolved oxygen. The marginal cost of treatment is, however, a rising function, given by the equation MC treatment = 5 + 2Q, where Q is the dissolved oxygen target. Each household is willing to pay for the monthly treatment necessary. Their MWTP functions5 are given by

Each household’s MWTP function is its inverse demand curve for quality of water

MWTPa = 14 – 2Qa

MWTPb = 6 – Qb

The table below evinces how each household’s marginal willingness to pay for increasing levels of water quality and the marginal costs. It also indicates the total marginal willingness to pay, which is the sum of the personal values. We can aggregate the MWTP of the two households by adding their MWTP functions to get the aggregate MWTP which is = 20 – 3Q

 
Dissolved oxygen Household B Household A Total Marginal cost of control
0 6 14 20 5
1 5 12 17 7
2 4 10 14 9
3 3 8 11 11
4 2 6 8 13
5 1 4 5 15
6 0 2 2 17
7 0 0 0 19

 

The socially efficient level of water quality is gotten by setting the aggregate MWTP function equal to the MC function to get:

20 – 3Q = 5 + 2Q