436 Lecture Note 2 SU17

Amount of pollution the effect of the allocation of

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Amount of Pollution The effect of the allocation of rights on the efficient level of pollution can be illustrated using Figures 2.2 and 2.3. In both figures the physical benefits and damages are the same, but their dollar value may differ. For the case in Figure 2.2, the polluters have the right to pollute, so the victims would have to pay the polluters to decrease pollution. Therefore, the dollar value of marginal damages is equal to the victims’ marginal willingness to pay (MWTP) and the dollar value that the polluters would have to receive is equal to their marginal willingness to accept (MWTA). However, for the case in Figure 2.3, the potential victims have the rights so the polluters would have to pay the victims to allow the amount of pollution to increase. Therefore, the dollar value of marginal benefits is equal to the polluters’ MWTP and the dollar value the victims would have to receive is equal to their MWTA. For individuals, but not necessarily firms, the MWTA to give up something is generally much larger than the MWTP to obtain something. This is partly due to the income effect; if you have something and are selling it you are richer than if you want
2.6 ECON 436 SU17 the same thing and have to pay for it. Empirically, MWTA is actually greater than MWTP by much more than the income effect, for reasons that have not yet been fully understood. Assuming that the polluters are individuals rather than firms, their MWTA to give up pollution will be greater than their MWTP to be allowed to do it, and therefore the dollar value of marginal benefits from each unit of pollution in Figure 2.2 will be more than their dollar values in Figure 2.3. And if the victims are individuals, their MWTP to reduce pollution will be less than their MWTA to allow it, and therefore the dollar value of marginal damages from each unit of pollution in Figure 2.2 will be less than their dollar values in Figure 2.3. Figures 2.2 and 2.3 are combined in Figure 2.4. The black lines correspond to the lines in Figure 2.2 and determine the efficient level of pollution when the polluter has the right to pollute, and the red lines correspond to the lines in Figure 2.3 and determine the efficient level of pollution when the victims have the right not to be adversely affected by pollution. The efficient level of pollution when the victims have the rights, Q , is less than the efficient level of pollution when the polluters have the rights, Q . Figure 2.4 Efficient Amounts of Pollution \$ Pollution MB (MWTA) MD (MWTP) Q P * MD (MWTA) Q V * MB (MWTP) Equity and Fairness If the conditions for the Coase theorem were satisfied, then efficiency would be attained whether the polluters or the victims had the rights, so the fact that the total