Chapt 12 2_07 - Chapter 12 Private Markets and the...

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Chapter 12. Private Markets and the Environment: The Coase Theorem How can we achieve pollution reductions? Can we achieve efficient outcomes when environmental goods are involved? Private markets, in the absence of market imperfections, will achieve efficiency. If a market fails, though, inefficiency will result: for instance, polluters will ignore the damages that they cause, and an inefficiently high amount of pollution will harm people. This chapter will consider one important approach to solving the problem of market failure: assigning ownership rights for goods that previously did not have rights, and allowing a market to form. The Benefits and Costs of SOx 1 Sulfur oxides (SOx, primarily sulfur dioxide, SO 2 , a major cause of acidic deposition and particulate matter) can significantly harm human health and ecosystems: for instance, some lakes in the U.S. and Europe have become too acidic for fish because of SOx emissions. SO x been regulated under the U.S. Clean Air Act since 1970; by 2010, under current rules, SOx power plant emissions nationally are expected to be 9.1 million tons per year. Is this the right amount of SO x emissions? Can market forces be used to determine the right amount of emissions? Let’s start by looking at some estimate s of the efficient amount of emissions. In the early 2000s, the administration of President George W. Bush and several lawmakers made varying proposals for further reductions of these compounds, which come primarily from coal-fired power plants. President Bush’s Clear Skies proposal 1 Banzhaf, H.Spencer, Dallas Burtraw, and Karen Palmer. “Efficient Emission Fees in the US Ele ctricity Sector.” Resource and Energy Economics 26 (2004): 317-341.
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would reduce SOx emissions to no more than 3 million tons in 2018. An alternative proposal, by Senator Jeffords, would reduce SOx emissions to 2.25 million tons in 2009. While the time difference is in fact important, let’s l eave it aside for now and focus on the amount of emissions reductions. How much should power plants reduce their emissions of SOx, and how much should they be allowed to continue to produce? A group of economists set out to estimate the efficient level of abatement. Figure 12.1 has the amount of SOx emissions abated--that is, the improvement in environmental quality measured in millions of tons on the horizontal axis, and the vertical axis measures dollars per ton of SOx abated. The marginal benefits of abatement curve (the demand curve for SOx reduction) is flat; the flatness means that people are willing to pay a constant $3500/ton for further reduction in SOx, regardless of the amount already cleaned up. The marginal cost of abatement measures how much power plants will have to spend to reduce SOx emissions by one more ton. The marginal cost of abatement is less than $1000/ton for the first million tons; it increases to $3500/ton when 8 million tons are abated; and it is well over $7000/ton for complete abatement, or elimination of all 9.1 million tons that power plants are expected to emit in 2010.
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