Role I.
The of Uncertainty: Theory (continued)
Using the results we covered Monday, we began class deriving rules for the desired
policy based on the slope of the marginal damage function (MDF):
o When MDF is steeper, mistakes with quantity are more costly. Thus, regulation is
a better option.
o When MDF is flatter, a tax is better, because the tax represents MDF well.
A third option is to combine permits with a safety valve.
o One problem with the above analysis is that fees are rarely used.
o Permits are more practical politically, but restrict quantity even if costs are high.
o This proposal combines both features.
o Implementation:
Along with emissions targets, the government sets a trigger price (e.g.
$25 per ton of carbon).
If the price of permits rose above the trigger, the government would sell
extra permits to maintain this price.
o Political analysis
Conservatives view it as a tax.
Environmentalists fear stringent standards will not be met.
II. Toxins
Properties of toxins:
1. Toxins are found in small amounts.
Also, it means that exposure to small amounts led to adverse health
effects.
Steep MDF implies quantity regulation is best.
2. Uncertainty is a concern
Because health effects occur after repeated exposure, establishing links
between exposure and health is difficult.
Because toxins occur in small amounts, monitoring is difficult.
3. Generally synthetic or inorganic and persist for a long time
Therefore, a stock pollutant.
Market failures related to toxins.
1. Externalities
Firms dont account for social costs of disposing wastes.
Particularly difficult because toxins are a stock pollutant.
Therefore, MDF increases over time.
2. Imperfect information
If people choose to accept risks of consumption, it is not a market failure.
However, are people able to assess risk properly?
Risk perception is a problem.
Therefore, government may mandate that information be provided (e.g.
warnings on cigarette packages).
Risk may be to future generations, who are not currently represented in the
market.
III.
Policies for Toxins
To deal with the externalities problem, command and control regulation of toxins is often
desirable, as threshold effects are a concern.
o Examples:
Toxic Substances Control Act
Passed in 1976, this bill gives the EPA power to:
Regulate all new chemicals
Require testing on existing chemicals
The goal is efficiency: cost-benefit analysis is to be used!
Regulating food additives
Food additives were originally regulated by the Delaney Clause
Passed in 1958.
Prohibits the use of additives that cause cancer in animals
in processed food.
Problems:
Does not recognize cost/benefit analysis.
Scientific advances make more accurate
measurement of cancer risk possible.
Therefore, old cancer-causing pesticides are
allowed, but new pesticides that have less,
but still some, risk of cancer prohibited.
Because of these problems, Congress passed the Food Quality
Protection Act of 1996, which simply required that pesticides used
in processed foods be set at a "safe level."
Deposit-refund systems
o Consumers pay a deposit when purchasing products with toxic waste (e.g.
batteries).
o When the product is disposed of properly, the deposit is returned.
Liability systems
o Require toxic waste generators, transporters, and disposal site operators to pay for
the damages they are responsible for.
o Liability laws hold parties responsible for the negative consequences of their
behavior.
As a result, liability laws internalize the externality.
o In theory, this can lead to an efficient solution.
Because we are dealing with uncertainty, we want to model the level of
precaution taken, which affects the probability of an undesirable outcome.
Firms weigh the benefits of precaution (reduced marginal damages, which
they must pay if held liable) versus the marginal cost of greater protection.
Note that these are social benefits, since the firms are held liable
for all damages.
Thus, liability leads to the efficient level of precaution.
o Types of liability
Strict liability the person doing damage is responsible, whether or not
proper precautions are taken.
Negligence the injurer is held responsible only if that person has taken
less than the desirable level of precaution.
Requires the courts to determine what an appropriate level of
caution is.
Joint and several liability when the source of damages could be several
parties, any one party can be sued for all the damages.
The theory behind this is that the party sued will have to
go incentive after the other parties.
Used in Superfund
Part of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA)
EPA is to identify, evaluate, and remediate hazardous waste
sites in the U.S.
Key features:
A financial fund derived from a tax on chemical and
petroleum feedstocks to be used for investigations
and cleanups.
A National Contingency Plan (NCP) for selecting
sites for cleanup, including creation of a National
Priorities List (NPL).
Authority for the EPA to clean up sites itself or to
identify responsible parties to clean up the sites.
A liability provision to collect damages from
responsible parties. Superfund uses joint and
several liability.
Leads to large legal costs
Estimates range from 7% to 41% of cleanup costs
go to legal and other transactions costs
Advantages of liability
It is very decentralized and requires less information.
To regulate, information must be known before regulation put in
place.
For liability, dont need information until after damages are done.
Note that this helps deal with monitoring problems that can occur
with toxins.
Disadvantages of liability
If the hazard is common, it makes more sense to regulate than to have
each case go to court.
Suits might not always be brought against violators.
Uncertainty about the legal process:
If penalties will push firms into bankruptcy, they will not have to
pay, and thus will not take proper precautions.
o
o
Alternatively, if a firm is risk averse, they may take too much
precaution, because they may fear an unfavorable court ruling.
A new policy option that deals with the problem of joint and several liability are
brownfields
.
o Because firms dont want to buy potential Superfund sites, the EPA now gives
some waivers to purchasers of abandoned sites.
o Often done at state level. Can work in different ways:
Protection from liability
Generally, firms avoid liability as long as they dont further
contaminate the site.
Different cleanup standards depending on future uses of the land.
Providing financial assistance for cleanup.
o Brownfields Revitalization and Environmental Restoration Act
Signed January 11, 2002.
Provides new grants for brownfields development
Reduces liability of purchasers by allowing states that keep public records
of sites to issue liability waivers.
Finally, since imperfect information is one of the market failures with toxic substances,
some policies simply provide information.
o Resource Conservation and Recovery Act of 1976 (RCRA)
Cradle to grave management approach for hazardous waste.
Note that this is broader than just toxic chemicals, but all sorts of
waste that pose substantial threat to the environment (e.g. heavy
metals).
Goal is waste management strategies to control waste than cannot be
eliminated, rather than trying to reduce waste.
1984 reauthorization put more emphasis on treatment technologies and
reducing waste.
Makes it more difficult to dispose of untreated hazardous waste.
Both encourages treatment, but also substitution away from
hazardous waste, since it raises costs.
Major components:
Identification of hazardous wastes
However, only 4-5% of wastes are shipped off site.
Most large firms manage wastes on premises.
Costs fall mainly on smaller firms.
Might it encourage illegal dumping.
National manifest system for tracking and monitoring movement
of waste
Makes sure waste is accounted for at each step of transport,
and that it reaches its final destination (no illegal dumping)
Permit system for treatment, storage, and disposal facilities
(TSDFs)
Develops standards for TSDFs
Focus for permits and standards is to reduce groundwater
contamination.
A concern is that uniform standards do not take local
conditions into account, so may be too costly.
In addition to these laws, some states charge waste disposal
fees for hazardous wastes.
Some countries, such as Demark and Finland, also
do this.
Toxic Release Inventory (TRI) requires companies to report their releases of 450
chemicals known or suspected to be toxic.
(We'll discuss TRI more on Monday).
Passed in 1986
Data first made public in 1989
Bad publicity led to reductions in toxic emissions
Releases of the 17 most toxic chemicals fell 51% from 1988 to 1994
Note that this law introduced no new limits
Rather, just the information provided led to reduced level of
toxins!
The ability of citizens to make use of information seems important.
Reductions are greater in areas with higher incomes and/or
education.
o