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Unformatted text preview: Econ 160, Vardanyan 1 Chapter 16 Environmental Policy In Chapter 6 we talked briefly about market failure a situation in which the equilibrium in the market fails to maximize total welfare. One of the reasons for market failure was imperfect information, discussed in Chapter 14. Another one was the presence of positive externalities, analyzed in the previous chapter. Here we look at yet another cause of inefficiency in the markets, which is caused by the imposition of external costs. We will discuss the example involving marketable pollution permits that help correct this problem. The Optimal level of Pollution and Pollution Taxes Should we eliminate pollution? Although the benefits of this are very appealing, there will be costs as well. For example, eliminating trucks and using horse-drawn wagons will make the air cleaner but will also increase shipping cost and the prices of goods and services. Thus, the problem is in finding a level of pollution that is optimal. To determine an optimal level we use the marginal principle increase the level of activity if marginal benefit (MB) exceeds marginal cost (MC), reduce the level of activity if MC>MB. If possible, pick a level of activity at which MB=MC . We will define the activity in terms of pollution abatement, which is associated with both benefits (such as better health and increased enjoyment of the natural environment) and costs (pollution abatement is costly because it requires the usage of resources). Let us consider an example in which we will determine an optimal level of the abatement of sulfur dioxide (SO 2 ), which is being produced jointly with electricity by the electric utility plants and represents a major cause of acid rain. Using the results from a recent study, the benefits associated with the abatement of one ton of SO 2 are equal to $3,500. The marginal cost of abatement increases with the amount abated, since at some point it becomes harder and harder to abate more tons as more and more costly abatement technology will have to be utilized. The optimal level of abatement is given in Figure 16.1; it is equal to 8 million tons per year, which corresponds to the pollution level of 1.1 16....
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- Fall '08