Environmental Economics, Econ 4545

University of Colorado, Spring 2001

Instructor: Vijaya Sharma, Ph.D.

Brief Notes of My Lectures

  1. Trade-off between Market Goods and Environmental Quality
  1. Linkage Between Economy and Environment
  1. Simple Model of Pollution Control

Marginal Damage Function (MD)

Marginal Abatement Cost Function (MAC)

Efficient Level of Emission

  1. Cost Effectiveness and Equimarginal Principle

Let a firm have two plants: Plant A and Plant B. The table below shows marginal abatement costs (MACs) of reducing pollution in the two plants.

Quantity of Emission Reduction, units

MAC of Plant A

$ per unit

MAC of Plant B

$ per unit

1

0.60

0.70

2

0.65

0.75

3

0.70

0.80

4

0.80

1.00

5

0.90

1.15

6

1.00

1.35

According to the equimarginal principle,

  1. if total targeted reduction of pollution is 10 units, the total cost minimizing allocation of abatement should be 6 units in Plant A and 4 units in Plant B, with MACs of $1.00 in both plants. Verify that any other allocation increases the total cost.
  2. If total targeted reduction of pollution is 7 units, the total cost minimizing allocation of abatement should be 4 units in Plant A and 3 units in Plant B, with MACs of $0.80 in both plants.
  3. We can tabulate (see below) the cost-effective MAC schedule of this firm, for all levels of emission reduction. If these were the only two plants in the industry that emitted the pollutants, we would use the following schedule as the MAC (instead of MAC of Plant A or that of Plant B) in our MAC-MD model of pollution control discussed earlier.
  4. Before we part with this section, let us, therefore, remember that cost effective allocation of a given level of emission reduction is achieved when MACs of all sources (polluters) are equalized for that level of reduction. In other words, remember the equimarginal principle of cost effectiveness.

Cost Effective MAC Schedule

Quantity of emission reduction

1

2

3

4

5

6

7

8

9

10

11

12

Cost-effective MAC, $

0.60

0.65

0.70

0.70

0.75

0.80

0.80

0.90

1.00

1.00

1.15

1.35

Allocated to Plant

A

A

A (B)

B (A)

B

A (B)

B (A)

A

A (B)

B (A)

B

B

  1. Performance of Free Market in the Presence of Negative Environmental Externalities
  1. Economics of Emission Charges

Rationale

Economics

Level of charge

Efficiency/Cost Effectiveness

Equity

Incentive to innovate

Enforceability

  1. Economics of Tradable Discharge Permits

Rationale

Modus Operandi

Economics

Efficiency/Cost Effectiveness

Incentive for innovation

Enforceability

  1. Comparison of Tradable Discharge Permits with Equivalent Emission Charges