CHAPTER 5 by Fatin Farhanah

CHAPTER 5 : Conventional Solutions to Environmental Problems Command-and-Control Approach

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CAC approach

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The command-and-control approach is a policy that directly regulates polluters through the use of rules or standards.

Environmental standards

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Rules and regulations implemented for the treatment and maintenance of the environment.
include setting the limit of pollution,
prohibition of specific activities.

Types of Environmental Standards

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Ambient standard – a standard that designates the quality of the environment to be achieved, typically expressed as a maximum allowable pollutant concentration.

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Technology-based standard – a standard that designates the equipment or method to be used to achieve some abatement level.

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Performance-based standard – a standard that specifies a pollution limit to be achieved but does not stipulate the technology.

Efficient Standards

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MSBAbatement = MSCAbatement

MSB of Abatement

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the additional social gains as pollution abatement increases.
Measured as reduction in damages or costs caused
by pollution.
( - ) slope

MSC of Abatement

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the sum of all polluters marginal abatement (MACs) costs plus government’s marginal cost of enforcement (MCE).
MSC = MACMKT + MCE
( + ) slope

Firm-Level MAC

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It measures the change in cost from reducing pollution, using least-cost method.
Typically positively sloped and
increasing at increasing rate.

Why Standards May Not Be Efficient

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1. Legislative Constraints

Many standards are benefit-based, i.e., set to improve society’s well-being with no consideration for the associated cost.

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2. Imperfect information
-Inability to identify MSB and/or MSC :

MSB: due to the problem of non revelation of preferences.
MSC: difficulty in identifying each firm’s MAC, including implicit costs.

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3. Nonuniformity of pollutants

Changes in emissions do not have uniform effects on environment.
e.g., if polluters are at different distances from populations or ecosystems, MSB would vary.

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4. Regional differences

Even if AE is identified at the national level, it is not likely to be efficient at regional level.

4 Reasons

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Inefficient due to legislative constraints

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Most environmental regulations are benefit-based.
Protect human health & the environment.
Very rarely the costs of enforcing them are being fairly considered.
Eg: mobile air pollution control may lead to
high cost to vehicles owners if they are
required to install certain devices.

Inefficient due to imperfect information

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To equate MSB = MSC of abatement requires information on benefits and costs.
Benefits may be understated due to non revelation of preference.
Costs may be understated too due to inability to capture implicit costs.
Eg: cost of unemployment if abatement leads to firms laying off workers due to high cost, cost of inconvenience to consumers.

Inefficient due to Regional Differences

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Consider two regions, X and Y, with same MSC of abatement.
Suppose their MSB of abatement curves differ, such that MSBX < MSBY

Nonuniformity of pollutants

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The further away a pollution source from an area, the less damage it is to the population of that area.
the closer to the pollution, the more damaging to
the area.
The standards need not be standardized to both
areas in this case.
If standards are set uniformly across all areas, then in less damaged area, it is overallocated, and in more damaged area, it could be under allocated.