Unit 2

Modelling Solutions to Environmental Problems

Lecture 4: The Command-d-Control Approach

Objectives

To describe the
Explain the general To explain the different environment Discuss the
approaches for command-and-control standards, and weaknesses of the
implementing approach – i.e., describe how they are command-and-control
environmental policy environmental policy based on approach from an
rules and regulations, referred
used in environmental
to as environmental policy economic perspective.
standards. Ambient standards,
performance-based standards Inability to satisfy the
Technology-based standards allocative efficient criterion
The inability of the command-
and-control to satisfy the cost-
effectiveness criterion
Lecture Outline

Policy Approaches to
Environmental Management

Command-and-Control Approach

Evaluating the Effectiveness of the

Command-and-Control Approach
Lecture Outline

Policy Approaches to
Environmental Management

Command-and-Control Approach

Evaluating the Effectiveness of the

Command-and-Control Approach
 ❑One of the key outcomes from Unit 1 is that market failure
(i.e., production and consumption of environment) is the
primary cause of environmental damage.
❑ Market failure arise because of environmental goods and
services are public goods; environmental damage is an
externality; and absence of property rights for environmental
goods and services.
❑ According to the Coase Theorem assignment of property rights
Policy can address environmental problem. But this can only be done
under certain conditions – i.e., costless transactions and ability
Approaches to to empirical quantify environmental damages in monetary terms.
❑ The limitations of the Coase Theorem makes it application in
Environmental practice difficult

Management ❑Therefore, because of market failure governments are required

to intervene in the markets for environmental goods and
services (i.e., production and consumption of environmental
goods and services) so that sustainable environmental
outcomes are realised.
❑ From lecture 4 we know that the solution to environmental
problems is the internalization of the externality.
❑ The internalization of the externality is only feasible if it is
backed by laws, and hence the internalization of externality is
only feasible through government interventions.
 ❑There are two general approaches that governments used to
address environmental damage or manage the environment:
❑ The command-and-control approach also know as the
conventional approach (i.e., the focus of this lecture)
❑ The market approach also know as the neoclassical approach
(i.e., the focus of lecture 6)
❑From an economic efficiency perspective, government
Policy interventions in the markets for environmental goods and
services achieves sustainable environmental outcomes if and
Approaches to only if any of the following criterion are satisfied:
❑ Allocative Efficiency – i.e., the intervention or policy must
Environmental balance social benefits and social costs at the margin
❑ Cost-effectiveness – i.e., the intervention or policy that is
Damage implemented must have the lowest cost, among alternatives
❑Therefore, from an economic efficiency perspective,
government interventions achieve sustainable environment if
the allocative efficient condition or cost-effectiveness
condition are satisfied
❑The two conditions are, in fact, the criteria that are used when
evaluating the environmental management policies (i.e., the
effectiveness of government interventions)
 ❑In this lecture we will analyse the effectiveness of
government’s use of command-and-control
approach to respond to environmental damage or
market failure.
❑The effectiveness of the command-and-control
Policy approach will be evaluated on the basis of the
Approaches to allocative efficiency and cost-effectiveness.
❑The main conclusion from the analysis in this
Environmental lecture is that the command-and-control approach,
Damage in most cases, do not satisfy the allocative
efficiency and cost-effectiveness criteria.
❑In fact, this major weakness of the command-and-
control is the rationale for the development of the
market approach to respond to environmental
market failure.
Lecture Outline

Policy Approaches to
Environmental Management

Command-and-Control Approach

Evaluating the Effectiveness of the

Command-and-Control Approach
 ❑Command and control approach is one where
government formulates and implements a policy that
directly regulates polluters (causer of environmental
damage) through the use of rules and regulations (i.e.,
formally referred to as environmental standards).
❑Under the command and control approach government
The Command sets environment standards, which must be adhered to
by polluters.
and Control ❑From economic perspective, the purpose of
Approach environmental standards is to achieve:
❑allocative efficiency (i.e., balancing social
benefits and costs at the margin)
❑cost-effectiveness (i.e., using the least amount of
resources to achieve the objectives)
Environmental Standards
❑Environmental standards are a set of policy guideline(s) or rule(s) that
regulates human activity, and the effects of these activities on the environment.

❑Standards are the fundamental basis of most environmental policies.

❑Standards may specify a desired state – e.g. lake pH should be between 6.5 and 7.5 or the
land carrying capacity should less 16Ha per LSU)
❑Standards also limit resource use (e.g., fish or hunting quota) or resource alterations (e.g.
no more than 50% of natural forest may be damaged)

❑The Department of Environmental Affairs, under MET, is empowered by the

Environment Protection Act to formulate and enforce environmental standards
in Namibia.
Types of Environmental Standards

❑When environmental standards are defined in the law, they can be specified as ambient
standard, technological-base standard and performance-based standard.
❑Ambient standard – a standard that designates the quality of the environment to be
achieved, typically expressed as a maximum allowable pollutant concentration or
effluent concentrates.
❑Technology-based standard – a standard that designates the equipment or method to
be used to achieve some abatement level
❑Performance-based standard – a standard that specifies a pollution limit to be
achieved but does not stipulate the technology
Economic Implications of Using Standards
❑Although the use of standards sounds straightforward, there are economic
implications to be considered:
❑The level at which the standards are set.
❑Are the standard being used to define environmental objectives set at a
level that is allocative efficient? In other words, are the marginal social
costs of pollution abatement equal the marginal social benefits of pollution
abatement?
❑The implementation cost of the standard.
❑Given the predetermined environmental objective, is the implementation
of that environmental standard cost-effective? In other words, are the
marginal costs of pollution abatement equal for all the polluters.
❑In this lecture, our goal is to assess whether the environmental standard set by
government satisfies the allocative efficiency and cost-effectiveness conditions
Are Environmental Standards Allocative Efficient?
❑Because environmental objectives are defined by standards, it is
important to determine whether these standards are allocative
efficient.
❑This criterion is satisfied if and only if the economic resources are allocated
such that the concomitant benefits and costs to the society are equal at the
margin – i.e., if and only if the MSB = 𝑀𝑆𝐶.
❑Assessing allocative efficiency requires the estimation and comparison of the
MSB and MSC of a given environment standard.
❑Therefore, an environmental standard is allocative efficient only if it
is set such that the marginal social benefits of the standard is equal to
the marginal social cost of the standard.
Lecture Outline

Policy Approaches to
Environmental Management

Command-and-Control Approach

Evaluating the Effectiveness of the

Command-and-Control Approach:
Allocative Efficiency
 ❑Environmental objectives are defined by
standards, it is important to determine
whether these standards are allocative
Are efficient.
❑This criterion is satisfied if and only if the
Environmental economic resources are allocated such that the
Standards benefits and costs to the society are equal at
the margin – i.e., MSB = 𝑀𝑆𝐶.
Allocative
❑Therefore, an environmental standard is
Efficient? allocative efficient only if it is set such that
the marginal social benefits of the
standard is equal to the marginal social
cost of the standard.
 ❑For pedagogical purpose, the assessment of
allocative efficiency of environmental standards is
demonstrated by using a hypothetical example of
Pollution Abatement (i.e., a public good, with
positive externality).
Are ❑An example of Pollution abatement is used to illustrate
how environmental standards can be evaluated using
Environmental the allocative efficient criterion.
❑After understanding how to assess the allocative
Standards efficiency of a given pollution abatement level is
Allocative assessed, we will then discuss the likelihood of
government achieving such an outcome using
Efficient? environmental standards.
❑The outcome of the analysis will demonstrate that it is
highly unlikely that environmental standards are set at
an allocate efficient level.
❑This is the primary weakness of environmental
standards – i.e., they are not always set at an allocative
efficient level.
 Marginal
Are Social
Marginal
Social Costs
Benefits
Environmental (MSB)
(MSC)
Standards
Allocative Marginal Cost
Efficient? (Marginal Marginal
Abatement Enforcement
Key Concepts Costs – i.e., Costs (MEC)
MAC)
 ❑The Social Benefits of pollution abatement are all the
benefits associated with a cleaner environment – such as
improvements in health, ecosystems, etc.
❑If we measure how these benefits increase relative to
increases in abatement, we generate a function
Are Environmental representing the Marginal Social Benefits (MSB) of
Standards abatement.
Allocative ❑Therefore MSB of Abatement is a measure of the
Efficient? additional gains accruing to society as pollution abatement
increases (i.e., the society’s willingness to pay for pollution
Marginal Social abatement).
Benefit of Abatement
❑From an market perspective, the MSB of abatement is
society’s demand curve for pollution abatement, or the
demand for environmental quality. Therefore, MSB curve
is negatively sloped.
 ❑The Social Cost of pollution abatement are all the costs associated
pollution abatement
❑If we measure how these cost increase relative to increases in
abatement, we generate a function representing the Marginal Social
Cost (MSC) of abatement.
❑The Marginal Social Cost of pollution abatement – i.e., society’s
willingness to abate pollution.
Are Environmental ❑To estimate the MSC of abatement we need to model the cost to
society as polluters reduce their releases of contaminating residuals.
Standards This relationship is called Marginal Social Cost (MSC) of abatement.
❑MSC of abatement is the sum of all polluters’ Marginal Abatement
Allocative Costs (MAC) plus government’s marginal cost of monitoring and
enforcing these activities.
Efficient?
Marginal Social Cost of 𝑀𝑆𝐶𝑎𝑏𝑎𝑡𝑒𝑚𝑒𝑛𝑡 = ෍ 𝑀𝐴𝐶𝑓𝑖𝑟𝑚 𝑖 + 𝑀𝐶𝐸
Abatement
❑Therefore, MSC is comprise of two parts:
❑ Firm-level Marginal Abatement Cost (MAC): an aggregation of the marginal
cost of every polluter’s abatement activities.
❑ Marginal Cost of Enforcement (MCE): it is the marginal costs government
incurs to monitor and enforce those activities.
 Are Environmental Standards Allocatively Efficient?
Marginal Social Cost of Abatement
❑Firm-Level Marginal Abatement Cost is the Single Polluter’s Marginal Abatement Cost
marginal abatement cost – the change in costs
associated with increasing abatement – using the
least-cost method.
❑ MAC is positively sloped and increases at an
increasing rate.
❑ Notice as the firm continues to abate from 𝐴1 to 𝐴2 ,
the MAC increases by a proportionately greater
amount from 𝑀𝐴𝐶1 to 𝑀𝐴𝐶2 .Why?
❑ This reflect that fact that as the abatement process
continues and the environment becomes cleaner, it Effect of Cost-Saving Technology on the Polluter’s MAC Curve
becomes increasingly difficult and therefore more
costly to remove each additional unit of pollution.
❑ Changes in a firm’s abatement options change the
position of the MAC curve.
❑Market-Level Marginal Abatement Cost – the
horizontal sum of all polluters’ MAC functions.
 Are Environmental Standards Allocative Efficient?
Marginal Social Cost of Abatement
The Marginal Social Cost of Abatement
❑To derive the MSC, the MCE is vertically
summed with the Market-level MAC
𝑀𝐴𝐶𝑚𝑘𝑡 = ෍ 𝑀𝐴𝐶𝑖

❑At any abatement level A, the MCE is the

vertical distance between 𝑀𝐴𝐶𝑚𝑘𝑡 and
MSC.
❑Notice that this distance increases with
higher abatement levels. Why?
❑As pollution standards become more
stringent, polluters have a greater tendency
to evade the law, which calls for more
sophisticated, and thus more costly,
monitoring and enforcement programs.
 Are Environmental Standards Allocative Efficient?
Efficient Abatement Level
The Efficient Abatement level (𝐴𝐸 )
❑From economic theory, we know that MSB
and MSC simultaneously determine the
efficient level of abatement, which occurs at
the intersection of the two functions.

❑Therefore, the allocative efficient abatement

level is at 𝐴𝐸

❑An important question to ask is: what is the

likelihood of government setting a pollution
abatement standard at 𝐴𝐸 ?
❑ Answer depends on a number of
considerations, which we will look at in the
proceeding slides.
 Why Standards May
Not Be Efficient?
❑Whether or not government can set the
environmental standards at the efficient abatement
level (𝐴𝐸 ) depends on four main constraints.

❑The four main constraint that have been identified as

limitations to government setting environmental
standards at allocative efficient level are:
❑Legislative constraints
❑Imperfect information
❑Regional differences
❑Nonuniformity of pollutants
 ❑In reality, environmental standards are not always set at the
allocative efficient level because of legislative constraint.
❑Legislative constraints result from the fact that
environmental standards set by governments are always
benefit-based – i.e., set to improve society’s well-being with
Why Standards no consideration for the associated cost.
❑For example, in Namibia it can be said that the water quality
May Not Be standard in the Environmental Management Act is solely
motivated by the expected benefits of improved health and
Efficient? welfare. If costs are accounted for in the standard-setting
process, resources are likely to be overallocated to
Legislative abatement.
❑Therefore, legislatively allocative efficiency is not usually a
Constraints criterion for setting environmental standards. Hence, in most case
environmental standards are not set efficiently from an economic
perspective.
 ❑In reality, it is not always easy to estimate the parameters that
are required to set environmental standards at the allocative
efficient level.
❑In the absence of full information, it is difficult to estimate
Why MSB and MSC, and hence difficult to determine the
Efficient Abatement level (𝐴𝐸 )
Standards ❑Nonrevelation of preferences for environmental quality
(or environmental goods and services) makes it difficult to
generate the MSB curve (i.e., demand for environmental
May Not Be quality).
❑Implicit cost (i.e., opportunity cost) makes it difficult to
Efficient? generate the MSC curve (i.e., supply for environmental
quality)
❑Although in practice there are methods of estimating both
Imperfect MSB and MSC, the difficulties associated with
monetising the externalities, for instance, makes the
Information probability of accurately modelling MSB and MSC low
❑Therefore in the absence of full information is highly probable
that government will unknowingly establish the abatement
standard at some level other than the allocative efficient one.
Are Environmental Standards
set Efficiently?
Imperfect Information

• The figure illustrates the market for abatement in

equilibrium.
• Compare the efficient abatement level (𝐴𝐸 ) with the
other two (𝐴0 and 𝐴1 ).
• If the standard is set at 𝐴0 , MSB would be greater than
MSC, meaning society places higher value on reducing
pollution than it must give up in resources to achieve it.
• Hence, the 𝐴0 standard would be considered too
lenient (i.e., overallocation of resources to abatement).
• Conversely, a standard set at 𝐴1 would be too
restrictive (i.e., under-allocation of resource to
abatement).
• Only at 𝐴𝐸 would society consider the legal limit to be
allocative efficient.
• However, full information is needed to find this optimal level
of pollution abatement.
 Why Standards May Not Be Efficient?
Regional Differences
❑Even if the law, or environmental standard, and information permits
the balance of 𝑀𝑆𝐵 to 𝑀𝑆𝐶, there is a qualifier on the use of 𝐴𝐸 as
a national standard across all polluting sources. WHY?
❑ Because this optimal level is determined from MSB and MSC, both of
which assume absence of regional specific abatement benefits and
costs.
❑ The only way that 𝐴𝐸 would be allocative efficient in all the regions is
if the respective MSB and MSC functions defined for those locations
were identical.
❑By way of example, consider two hypothetical regions X and Y that
have identical MSC functions (i.e., 𝑀𝑆𝐶𝑋 = 𝑀𝑆𝐶𝑌 ) but different
MSB functions, such that 𝑀𝑆𝐵𝑋 is lower that 𝑀𝑆𝐵𝑌 .
❑Such disparity might be due to differences in income, education, or
population across the regions.
 Why Standards May Not Be Efficient?
Regional Differences
❑Region X’s allocative efficient
abatement level is 𝐴𝑋
❑Region Y’s allocative efficient
abatement level is 𝐴𝑌
❑So there is no way a single
national standard of abatement –
even if one is efficient on a
national level – would be optimal
for both regions.
Why Standards May Not Be Efficient?
Nonuniformity of Pollutants
❑An inefficient outcome can also arise within the same region, if changes in releases from
polluting sources do not have uniform impact on the environment.
❑Nonuniformity arise when polluters are located at varying distances from an exposed
ecosystem or population, even if their pollution releases are identical.
❑In general, the farther away from a source an affected population is, the lower the
associated damage – because of the greater opportunity for dilution of contaminants.
❑This in turn implies that the MSB of abatement varies inversely with distance
between the source and the affected population or resource.
❑Thus, even with equal MSC of abatement, the efficient level of abatement would not
be the same for all polluting sources.
❑Consequently, just as for regional differences, a nationally determined abatement
standard would not be optimal for all the sources.
Why Standards May Not Be Efficient?
Conclusion: implications of the constraints

❑ What are the implications of the four constraints discussed earlier?

❑ In most real world setting, at least one of the factors – legislative constraint, imperfect information, regional
differences, or uniformity of pollutants – will be present. Therefore, there is a low probability that an
environmental standard will be set at an allocative efficient level.
❑ In accepting this, we must rely on a different criterion to evaluate not where the environmental standards are set, but
how the cost of implementing the standards.
❑ This criterion is called the cost-effectiveness criterion, which means that an environmental standard, even a
nonoptimal one, should be implemented using the least amount of resources.
❑ In other words the cost-effectiveness criterion requires that the least amount of resources be used to achieve an
environmental objective.
❑ The evaluation of the cost-effectiveness of environmental standards is the primary focus of the next section.
Lecture Outline

Policy Approaches to
Environmental Management

Command-and-Control Approach

Evaluating the Effectiveness of the Command-

and-Control Approach:
Cost Effectiveness
Assessing the Cost Effectiveness of the
Command-and-Control Approach
❑The practical way to assess whether the command-and-control approach is cost-
effective (i.e., the cost-effectiveness of environmental standards) is to determine
whether society is incurring higher costs than necessary to achieve a given level
of environmental quality.
❑For pedagogical purposes let us consider some abatement standard as the socially
desirable (as opposed to efficient) outcome, motivated by the need to protect
human health.
❑In theory to achieve cost-effectiveness, policymakers must have identified and estimated the
cost of control instruments (i.e., ambient standard, technological based standard and
performance based standards) that can achieve this objective, and select the instrument with
the lowest costs.
❑There are two aspects of the command-and-control approach may violate the cost-effectiveness
criterion: the use of technology-based standards and the use of uniform standards.
❑ Technology-based standards dictate a specific abatement method to polluting sources. Therefore, these standards prevent
the polluter from minimizing costs.
❑ Uniform standards force high-cost abaters to reduce pollution as much as low-cost abaters, so more resources than
necessary are used to achieve the benefits of a cleaner environment.
Cost-effectiveness of the Technology Standard
❑Remember a technology standard is one that designates the equipment or method to be used to
achieve some abatement level.
❑Therefore, a technology standard prevents a polluter for minimising cost to achieve the given level
of abatement.
❑Remember that the MAC is defined under the assumption that the polluter chooses the least-
cost available abatement method or technology.
❑When government forces polluters to use technology specific abatement method to achieve a
given standard, it impedes the firm’s incentive to abate in a cost-effective manner.
❑Unless the mandated technology happens to be the least-cost approach for all polluters, some
firms will be forced to operate above their least-cost MAC. This implies that society is
incurring costs higher than the MSC of abatement.
❑The outcome is a waste of economic resources with no additional benefits to society
Cost-effectiveness of the Performance-based
Standard
❑If instead a performance-based standard were used, each polluter could select the means
by which it will achieve that standard.
❑Without regulatory guidance, economic theory predicts the polluter, spurred by the
profit maximization goal, would choose the least-cost abatement method.
❑As a result society will gain the benefits of a cleaner environment, but fewer
resources will be used to achieve that gain.
❑However, a word of caution. Although using performance-based based standards has
potential cost-advantages over using technology-based standards, this selection does
not by itself ensure cost effective solution.
❑In fact, regardless of which type of standard is used, resources will be wasted if they
are imposed uniformly across polluters.
Cost-effectiveness of Uniform Standards
❑Under the command and control approach, environmental standards are often imposed
uniformly across groups of polluting sources.

❑Now, the question is: cost-effective are uniform standards?

❑Uniform standards across polluting sources will waste economic resources as long as
the abatement cost differ among those sources.
❑For instance, the following factor might cause differences in abatement costs:
❑the age of the polluter’s physical plant (newer plants are built with the most
advanced and new abatement technology capable of meeting the standard at a
lower cost).
❑regional differences in input prices (e.g., labour, capital and land). As long as
input prices vary, so too will polluters’ costs to achieve a given standard.
Cost-effectiveness of
Uniform Standards
❑ But are uniform standards cost-ineffective?

❑ It is because uniform standards force high-cost abaters to reduce

pollution as much as low-cost abaters, therefore, more resources than
necessary are used to achieve a cleaner environment.
❑ Cost-saving could be achieved by having more of the abatement done
by low-cost abaters, compared to high-cost abaters.
❑ However, this can only be achieved if low-cost abaters are
incentivised to abate more.

❑ To illustrate how uniform standards are not cost-effective or how cost-

saving can be achieved, the proceeding slides provides cost analyses based
on a simple abatement model.
 A Simple Model of Pollution Abatement
Lets assume there are only two polluters in a region, each producing 10 units resulting in 20
units of pollution being released into the environment. Suppose Government determines
that the social desirable pollution level is 10 units across the region, and therefore, the
environmental standard is uniformly set at 10 units for all polluters. Since there only two
polluters in the region, it means that each polluter must abate 5 units. Suppose the following
are the functions for the Marginal Abatement Cost (MAC) and Total Abatement Cost (TAC)
for each firm:

• Polluter 1: 𝑀𝐴𝐶1 = 2.5𝐴1 and 𝑇𝐴𝐶1 = 1.25 𝐴1 2

• Polluter 2: 𝑀𝐴𝐶2 = 0.625𝐴2 and 𝑇𝐴𝐶2 = 0.3125 𝐴2 2

a. What is the total cost of this uniform standard?

b. Could the same standard be achieved at a lower cost?
 A Simple Model of Pollution Abatement:
What is the total cost of abatement?

❑Solution to Question a: What would the total cost of a uniform standard?

❑Using the uniform standard of 5 units the pollution abatement costs for each firm are:

2
❑Polluter 1: 𝑀𝐴𝐶1 = 2.5𝐴1 = 2.5 5 = $𝟏𝟐. 𝟓 and 𝑇𝐴𝐶1 = 1.25 𝐴1 = 1.25 52 = $𝟑𝟏. 𝟓

❑Polluter 2: 𝑀𝐴𝐶2 = 0.625𝐴2 = $𝟑. 𝟏𝟑 and 𝑇𝐴𝐶2 = 0.3125 𝐴2 2 = $𝟕. 𝟖𝟏

❑Therefore, the total abatement cost of the region is $39.06, which represents that value of resources used to
meet the standard.
 A Simple Model of Pollution Abatement
Could the same standard be achieved at a lower cost?
❑Answer to Question b: Could the same standard be achieved at a lower cost?
❑The answer is Yes! Polluter 1: 𝑀𝐴𝐶 = 2.5𝐴 and 𝑇𝐴𝐶 = 1.25 𝐴 2
1 1 1 1
2
Polluter 2: 𝑀𝐴𝐶2 = 0.625𝐴2 and 𝑇𝐴𝐶2 = 0.3125 𝐴2

❑Notice that Polluter 2 has an abatement cost-advantage over Polluter 1. Why?

❑Therefore, it would be cheaper if polluter 2 were to do more of abating.
❑Of course Polluter 2 must have an incentive to abate more, and can come to an agreement with
Polluter 1. This would not be possible if government forces very polluter to abate by the same
amount.
❑Therefore it can be concluded that uniform standards under the command and control
approach does not achieve cost-effectiveness criterion as long as MAC conditions
differ across polluters.
❑In fact a standard is cost-effective only if the MAC of all firms are equal – i.e., based
on the economic principle of equi-marginal
 ❑Is it possible to reallocate abatement levels across the
A Simple two polluters to achieve cost effectiveness?
❑The answer is Yes!
Model of ❑Microeconomic theory provides concepts on how
government can achieve cost-effectiveness. If each
Pollution polluter were to abate to the point where the
corresponding level of MAC is equal across firms,
Abatement the cost-effective abatement criterion would be
achieved – implying that the environmental standard
Could the same would be met at minimum cost. This result is one
application of a microeconomic theory called the
standard be Equimarginal Principle of Optimality.
❑The equimarginal principle of optimality states that
achieved at a the cost-effective abatement level is where the MAC
is equal across all polluters.
lower cost? ❑To illustrate the equimarginal principle of optimality lets
go back to our simple abatement model
 A Simple Model of Pollution Abatement
Could the same standard be achieved at a lower cost?
❑To implement the equimarginal principle of optimality, we need to
find the abatement levels for each polluter such that their MAC are
equal, holding the combined abatement level constant.
❑We can use algebra to find the abatement levels with respect to each
polluter. The steps are as follows:

• Step 1: set, 𝑀𝐴𝐶1 = 𝑀𝐴𝐶2 ⇛ 2.5𝐴1 = 0.625𝐴2 ⇛ 2.5𝐴1 − 0.625𝐴2 = 0

• Step 2: define the desired abatement level, 𝐴1 + 𝐴2 = 10

• Step 3: solve the two equations simultaneously: 𝐴1 = 2; 𝐴2 = 8

 A Simple Model of Pollution Abatement
Could the same standard be achieved at a lower cost?
❑A graphical illustration of the solution (i.e., the cost-effective
abatement level) is shown in the figure below.
❑If each polluter were given these firm-specific abatement targets,
the total cost of achieving the environmental objective would be
minimized.
❑The cost for polluter can be calculated, by substituting the cost-
effective abatement levels determine by the equimarginal
principle of optimality.
❑𝑇𝐶𝑎𝑏𝑎𝑡𝑒𝑚𝑒𝑛𝑡 = 𝑇𝐴𝐶1 + 𝑇𝐴𝐶2 = 1.25 𝐴1 2 + 0.3125 𝐴2 2
❑∴= 1.25 2 2 + 0.3125 8 2 = $25
❑By following the equimarginal principle of optimality, the total
cost to society of achieving the 10-unit abatement standard is
$25, which is a $14.06 savings over the uniform standards
approach (i.e., $39.06).
❑Equivalently, this $14.06 presents the unnecessary costs incurred
by society when a uniform standard is imposed across
nonidentical polluters
 ❑As a final point, it is reasonable to ask how in practice the
A Simple government could arrive at these firm-specific abatement
standards within a command and control framework.
❑The answer is that it would have to know the
Model of abatement costs conditions of every firm it was
regulating.
Pollution ❑Of course this kind of information would be difficult to
determine, particularly when there are many polluters.
Abatement ❑But there is a way around the problem, although not
within the command and control framework.
❑The solution to the problem is found under the market
Could the same approach, where the firm’s specific cost-effective
abatement levels are determined without specific
standard be knowledge of the polluters’ costs.
❑This limitation of the command and control approach is
achieved at a addressed by the market approach. How does the market
approach address this problem?
lower cost? ❑By using market incentives and the price mechanisms in
place of inflexible rules.
 Class Exercise
❑Assume that two power plants, x and y, release 𝑆𝑂2 in a small urban community
that exceeds the emissions standards. To meet the emission standard, 300 units of
𝑆𝑂2 must be abated in total. The two companies face the following abatement
costs (in thousand of Namibian dollars):

𝑀𝐴𝐶𝑥 = 16 + 0.5𝐴𝑥
𝑀𝐴𝐶𝑦 = 10 + 2.5𝐴𝑦
a. Prove that a uniform standard is not cost-effective.
b. Determine how the abatement levels should be allocated between the plants in
order to minimize costs.
c. Estimate the cost savings that would result if the standard is implemented cost-
effectively and not uniformly? (Hint: you need to integrated the MAC functions to
get the TAC function for each plant)
 Summary
❑Governments generally use one of two approaches to implement
environmental policy: the command-and-control approach or the market
approach.
❑The command and control approach is implemented using environmental
standards.
❑There are three basic types of standards used in environmental control
policy:
❑ambient standards, which designate the level of environmental quality as a
maximum allowable pollutant concentration;
❑technology- based standards, which indicate the abatement method to be used; and
❑performance-based standards, which specify an emissions limit to be achieved.
 Summary
❑An environmental standard achieves allocative efficiency if resources are
allocated such that the marginal social benefit (MSB) of abatement equals
the marginal social cost (MSC) of abatement.
❑The MSB measures the additional gains to society associated with the
reduction in damages caused by pollution.
❑The MSC is the horizontal sum of the market-level MAC (𝑀𝐴𝐶𝑚𝑘𝑡 ) and
the government’s marginal cost of enforcement (MCE).
❑Four factors suggest that a government-mandated abatement standard is
not likely to meet the allocative efficiency criterion: (1) the existence of
legislative constraints, (2) imperfect information, (3) regional differences,
and (4) nonuniformity of pollutants.
 Summary
❑Two aspects of the command-and-control approach may violate the cost-
effectiveness criterion: the use of technology-based standards and the use of
uniform standards.
❑Because technology-based standards dictate a specific abatement method to polluting
sources, they prevent the polluter from minimizing costs.
❑Uniform standards force high-cost abaters to reduce pollution as much as low-cost abaters,
so more resources than necessary are used to achieve the benefits of a cleaner environment.
❑To achieve a cost-effective outcome, abatement responsibilities across polluting
sources must be allocated such that the level of MAC is equal across polluters
(i.e., equimarginal principle of optimality).
❑However the implementation of the cost-effective criterion has one major
limitation in practice: It is difficult to know the abatement costs of every firm that
is regulated, especially if there are many firms.
❑This limitation is addressed by the market based approach.