HomeMy WebLinkAboutControlling Pollution w/The Market 1981Frieda Reitman 7/26/81
(revised g/7/81 )
CuNTROLLING POLLUTION WITH THE ~iARKET
There is one problem in water management where it is suggested
the "market" be used: controlling pollution.* market solutions,
as proposed, do nat seem practical. Solutions which employ the
market, in part, (pollution charges) ere more satisfactory. Hosever,
there are reasons to prefer non-market solutions(government
standards.)**
The Objective of Control
Conceptually, there are a number of approaches to controlling
pollution. The ideal objective of control is to permit just the
amolunt of pollution ~hich maximizes the melfere of society, given
the trade-offs involved.
There are three difficulties implicit in this objective:
1. It is difficult to define, and sometimes to ascertain,
"amount" of pollution. There ere many pollutants. What ere the
trade-offs in reaching a 91yen level of contamination. Hop are
potential pollutants (on the land, but not yet polluting an
aquifer) to be included? How does one treat e partially polluted
aquifer?
2. It is difficult to knom when the ~elfare of society is
maximized. There is considerable literature on theoretical
approaches to this information, but even theoretical approaches
are not perfect, and practical approaches are very ~eak.
When a good is a strictly private good (bread),the market
may come close to achieving optimum production and consumption
of the good, given the income distribution. ~hen the 9ood is a
public good, there is no comparable method of achieving optima.
Environmental quality is a public 9ood because once it is "bought"
it is available to ail consumers.
*Using the market means determining the price end quantity
produced of a good by the interaction of buyers and sellers of
that good. In the instance, the 9ood can be "environmental
quality" (bought by society, sold by polluters) or "the right
to pollute" (bought by polluters, sold by society)
**Another possible solution is to put environmental protection
completely in the public sphere. However, there is no evidence
that socialist societies have done any better in the provision
of environmental services.
There may be areas ~here government control and o~nership
should be considered. Ownership of disposal sites is one area.
3. It is difficult to account for and measure all the
trade-offs. Less pollution of an aquifer may mean less pro-
duction of some products, or fewer activities ~hich lead to
pollution. This may cause less employment, use of different
products, etc. It may also lead to more pollution of other
environmental goods (air, surface.water.)
Even though it is difficult to specify the objectives of
pollution control, it must be done. It may be dons in detail
by ths legislative body, or it may Be broadly specified by the
legislature, leavin9 details to an administrative body.
Unce the objectives are specified, the administrative
body can then determine the "best" (least-cost> methods for
meetin9 the objectives. Ackerman & Hsssler present cogent
s~guments that "ends orient.ed" legislation Ispacifying
objectives~ is preferable to "means oriented" legislation
~specifyin9 methods for reaching objectives> end leads to
more efficient compliance.*
Some examples of alternative "ends oriented't objectives
for pretectin9 aquifers are:
No degradation of aquifer water.
All aquifer water should be of drinking water quality.
"80%" of aquifer water in the state should bs of
drinkin9 water quality. ~Tha rest can be degraded
if necessary to provide for other uses such ss waste
disposal sites, waste injection.>
Further discussion of these alternatives is in the section
"Choice of Ubjectiwes.~
*Bruce A. ~cker.man & ~illiam T. Hassler Clean Coal~
Dirty Air (Nam Haven, Yale University Press, 1~81.)
Three Approaches to Pollution Control
Having decided on an objective of pollution control, there
are three possible approaches: 1) e market solution, 2) uae
of charges lmp~ed by government, and 3) use of regulatory
"Standards.' Each should be judged by how well it meets its
objectives.
1. A ~arket Solution
A true market solution is one where the price of the com-
modity and the quantity produced are determined by the actions
of the buyers and sellers who meet in a "market" and bargain. It
is necessary to e) define the commodity, b) define the rights of
ownership and c) define the liability.
e) The commodity might be "clean water" or specifically,
water of "drinking water quality" (or any other quality. It might
be the "right to dump x gallons of chemical A in or over an aquifer."
8) It must be clear who owns the commodity. The community
may own the commodity (clean water) and the polluters bid for
the rights to pollute. Or, the polluters may own the commodity
(right to pollute) and the community bribe~he polluters not to
pollbte. Either way there are many transaction costs*in bargaining.
How does this fit with our current concepts of water ownership?
Hew do various water owners get to§ether to bargain with polluters?
c) In order for this system to work, liability must be
defined. If the polluters are fully liable for pollution, they
must pay to pollute. If polluters not et ell liable, citizens
have to bribe them not to pollute. Liability on the polluters
can range from zero to full. As lo.9 es it is specified, bar§sin-
in9 can take place. Theoretically, whatever, the liability spec-
ificatien, the same optimum will result. (9ivan zero transactions
costs.) *
This system for controllin9 pollution is valued because the
* Discussed in Alan Randall "Can We Trust the Market to
Solve Externality Problema?"in J. Richard Conner end Edna Loehman
Economics end Decision ~akinq for Environmental qUality, Univ. of
Florida, Cai.seville, Fie, 1974 p. 48.
** "Bribes" is not used in · derogatory sense. "Compen-
sation'' or "rewards" can be substituted.
the externalities of pollution ere internalized. Al! costs,
es vieeed by those who bear them, are borne by the goods mhich
create the externalities. Since water quality is a public good, a
and since each person may place a different price on giving it
up, a mechanism must be found to express group values. In the
instance eherea person's wel! is polluted and he is compensated
by the polluter, this works fairly easily. In other'bargaining
sessions, there could be many difficultieain reschtng agreement.
This system is rarely used; it is difficult to explain to people
and to organize. It probably has hi9h transactions costs. Some
analysts believe that the absence of a market in the many instanc~
where polluters have no liability ( as shown by the fact that
nc citizen groups have arisen to bribe the polluters) indicates
that the transaction costs are too high.e
There are many problems setting up a market pollution
control system. Some o? them are:
a. Specifying the ownership of the aquifer water.
b. Setting up a mechanism for the owners of an aquifer
eater supply to come to an agreement on objectives and to
bargain with polluters over price andJor quantity.
c. Setting up a mechanism for the owners of interconnecting
stream or aquifer water to participate in the bargaining.
d. Policing polluters. This is much more difficult for
aquifer water than for surface eater since pollutants can be
placed where they will not be detected for long periods.
In terms of the objectives of pollution control, this method
does not appear useful. ~heoretically, it could achieve the ob-
jectives. Practically, however, this is not an area where effi-
cient markets can easily exist; therefore, the objectives would
not be met.
Use of Charges Imposed by Government
A solution which relies on the market, in part, is the
per unit charge (tax) imposed on the polluter by the 9overnmsnt.
In this case, the ~ of pollution is determined by the
market in response--{-~-~-~'prica set by the government. Polluters
choose between payin9 the charge or paying to avoid pollutin9,
* Edna Loehman end J. Richard Conner "Economic Perspectives
on Environmental Decisions" in Conner end Loahman, ~P.CIT. p. 4.
The charges can be varied to attain the desired level of
pollution, which must be determined by other criteria. Once
the desired level is determined, this system mill lead to an
efficient allocation of pollution rights among polluters.
It encourages the reduction of pollution when the coat of
doing so is less than the tax, end permits pollution by those
who can afford to pay - those making products mhich society
wishes to purchase even st higher prices.
For this reason, this method of control is appealing. It
hms also proved practical in several instances; Germany has had
9ood success with the use o? effluent charges to control surface
water pollution. *
It is probably difficult to devi~e and
system for aquifer protection, however. Any
include surface and aquifer water together.
implement such a
such system should
How might charges be set?
a. There might be a set cha~gs for the disposal of a given
volume o? every pollutant over which control is desired. The
che~g~ would vary with the "seriousness" of the pollutant.
b. The charge might also vary with the disposal sits to
shift disposal to more desirable locations.
c. To protect the water supply, the charges would apply
to disposal over land as well as water. Disposal areas considered
relatively "safe" would have e lower charge.
d. Penalties would have to be assessed for violations.
e. All types of pollutants should be covered, including
municipal discharges and residential septic tanks, oil spills,
salt used on roads, agricultural fertilizer and pesticiQss, as
well as chemical, metal and other industrial wastes.
5oma of the problems which mould have to be solved ere:
e. Ho~ cmn one determine the "seriousness" of every
pollutant, end therefore the relative charge? Scientific evidence
of the health effects of various pollutants is not es clear es
one would wish. It may be clea~ that there is a hazard, but the
* Joseph J. Seneca and michael K. Teussig. Environmental
Economics. (Englewood £1i??s, J.J.; Prentice Hall Inc.,lg?4,P.24a.
extent of the hazard and the risks involved ere not clear. Also
synergistic effects may be present.
b. Hoe can one rank the disposal sites so as to establish
relative charges? Some of the criteria are established. Infor-
mation on various sites and associated aquifer and surface water
is nee being collected. It may be some time -before adequate
information is available. Also, decisions about ehich aquifers
ere ~eorth" protecting, and ehich may be degraded are not only
scientific, but social and politidal es nell.
c. The amount of risk ehich people are eilling to accept
is difficult to ascertain. Different people have different
risk acceptance/risk aversion levels. Hoe can these different
values be expressed - in an election? - in a questionnaire?
d. How can the risks involved in pollutin9 various sites
be evaluated and compared/ Scientific evidence is inadequate
here too.
e. Is it possible to monitor compliance? Large polluters
can probably be identified and a cradle-to-grave reporting system
(as under RCRA) may .be able, at some considerable cost, to ensure
compliance. Hoeever, it may be difficult to detect some evasion
lebelin9 snitches, for example. And Small polluters may be
undetected.
Protecting surface eater is simpler because illegal
disposal is much easier to locate. Since aquifer pollution may
not be detected far many years after disposal of contaminants,
illegal disposal may remain hidden until lon9 after disposal,and
penalties may be hard to assess appropriately. (Super~und
is attempting to clean up problems created in the past by assessing
current companies, not the "fairest" any.
~. The inclusion of municipal, household
castes in a protection scheme may be difficult
may also be difficult to enforce.
and agricultural
politically. It
9. It must be recognized that the settin9 of charges will
favor some companies over bthers, certain pollutants over others,
certain streams and aquifers over ethers, certain communities
over others. In general the scientific body of knoelege can
9ira guidance in setting charges, but the varying political,
social and economic effects must be considered too, The "best"
co~promise is not clear.
This solution to pollution centre! relies on the market,
in part. This is attractive. It does not fully meet the
objectives of a pollution control policy, but it approaches
them as well or better than any other method, and it appears
workable, althou9h with problems.
I~lany of the problems are the same ones which must be
resolved in any regulatory scheme. Society must decide on
the desired objectives ~hat level of risk is "acceptable?"
given that decision, what levels of pollution are "acceptable?"
~hen those decisions are made, a "price" can' be set so that
the 9gals are met at least cost.
Another factor affecting the use of this method of con-
trolling pollution is the public understanding and appreciation
of the method. This is oftep inadequate. Those advocating
"The market" often do so because of an ideological commitment
rather than an understandin9 of the efficiencies. 'Those
opposed to the "market" often view charges es "e license to
pollute", an almost immoral approach.*
Businessmen often believe paying "charges" will be more
expensive to the firm than meetin9 standards. They feel that
the fees collected will coma to be regarded as income to the
9overnment. If the charges induce firms to install pollution
ebatin9 equipment , and pollution is reduced, government income
will be reduced. They fear that the 9ouernment will then raise
the fees. Thus,business will eventually pay the same amount
of tax, after herin9 also paid for the new equipment.*
These attitudes cannot be ignored in decidin9 on a
pollution control program.
3. government-set standards
The third solution to pollution control is for the govern-
ment to set standards for pollution with penalties for non
compliance. This solution has a smell market component~ the
polluter may choose to meet the standard or not to meet the
standard and pay the penalty. Usually, however, this is not
considered · "market" solution.
*Stereo Kelman."Economists end the Environmental ~uddle",
The Public Interest #84, Summer 1981, pp. 106-123.
In many ways this solution is similar to effluent charges.
e. Theoretically, as long es the goal is not absolute
prohibition, both solutions should reach the same pollution
result - if information on all the variables is adeguate.*
Both attempt to reach an optimal level of pollution. In one cass,
the charge is set to lead to that situation; in the other case,
the "situation" is specified and the rules set directly.
b. Both forms of control require the same scientific
information on the impacts of pollution, relative importance of
various pollutants and various water resources, and the assessment
of risk. Often it is assumed that settin9 standards requires
less information than setting charges, but this is rarely so.
c. Under both solutions, efficient producers (those ,ho
can cut pollution et least cost) may receivs additional profit.
The 9oods produced by the industry ,hich is pollutin9 ,ill rise
in cost due to the introduction o? anti-pollution equipment or
the payment of charges. Dependin9 on the elasticity of demand
and supply, it ls possible that, at least in the short run, prices
mill rise to the level ,here the high cost producers can operate.
Lo, cost pr=ducers ,tll be more profitable then before..
In the long run, new 1o, cost producers'will'enter the
market, lo,er the price, drive out the high cost producers and
eliminate the extra profits.**
There ere also differences between the two solutions.
a. ~i/is ~has shown that although the level of output end
pollution are the same under the tho methods of control, profits
are loser under the tax alternative and prices Hill tend to be
higher. In the lan9 run, this leeds to less use of the product
csusin9 pollution end the elimination of the less profitable
firms. This helps in attaining the objective. It is one reason
~ills prefers the effluent fee solution.*~'
b. Regulations may favor the current producers. For example,
cutting pollution by 50% for each polluter doss not leave room
for new entrants to the market. A cha~ge system ,auld do so.
c. Control of pollution through government regulation is
essential in those areas Hhere absolute prohibition is desired.
~lthough "absolute prohibition" often seems to be uneconomical
( it does not consider trade-offs), it is the method of choice
~hen the consequences of the action to be prohibited are considered
horrible or ahen the consequences ers not clearly known end society
does not Hieh to take risks.
*Loehman e~d Conner, p. 5.
*-Ackerman
~,* Edwin 5o Nllls The Economics of Environmental quality
Ne, York: ~.~.Norton & Co., 1978, p. 48.
d. There seems to be a societal preference for regulation.
It appears simpler to implement because it is a more familiar
method of control and now controls (l,e. to protect aquifers)
can build on systems already in place. It may also make it
easier to adapt to local conditions. (This may be a disadvantage
because it may enable local coalitions to be more influential then
they should be.
e. The main disadvantage of standards ia that they do not
consider the differing costs of meeting the standards. For some
polluters there may be tremendous costs. Other polluters may have
small costs. From the point of view of the total cost to society,
the biggest decrease in pollution should be ma~e by the firm with
the lowest costs. This mould happen under "charges" not under
"standards." It may be possible to mitigate this disadvantage
· ith flexible implementation, however. (s~_below "making
Standards Work more Efficiently~)
f. According to Randall, despite the disadvantages, the
standards approach may be enforceable et lomer cost, 9ivan the
institutional setting.
~akin9 "Standards" work more Efficiently
It has already been noted that objectives as specified
by the legislature should be "ends oriented" so as to allow
the objectives to be mat at the lowest cost. Administrative
objectives or standards should also be ends oriented whets
possible. In addition, where possible, "trading" should be
psrmitted so that standards can be met most efficiently.
The EPA "Bubble" concept, used in lmplementeing sir
quality standards, is an example of the use of "trading" to
reduce the cost of meeting · regulation. Under this approach,
EPA sets en emission standard. A firm may then trade emissions
between different parts of the firm so as to meet the combined
level of emission in the least expensive manner.
Drayton discusses ways in which this
panded to permit other kinds of trading:
firms and between communities.*
concept can be sx-
trading between
Essentially, this sets up a market in pollution rights.
A firm that is able to reduce .pollution more then required
can "sell" its excess and thus recover some of the cost of
pollution abatement. Other firms ~hose cost of abatement ere
hi9h, will be able to meet regulation at lo,er costs by buying
rights.
Banking of rights might also be permitted. Savings today
(reduced pollution today) might be used to offset some additional
pollution tomorrow. Communities might be able to use this
concept to attract new industries.
"Trading rights" introduces a "market" dimension to the
standards concept. It enables firms to meet overall standards
at lo, est cost. There are some problems to consider ~ith
this approach.**
a. It cannot be used where absolute prohibition is desired.
b. It may discourage ne~ firms from investing in ne,er,
less polluting equipment, if "polluting rights" can be purchased.
Since ne~ equipment will presumably be used for a long time,
this may retard pollution control improvements.
c. There may be some geographic areas mhere higher standards
are desirable and restrictions to tradin9 may be enacted. ~any
restrictions to trading will dilute the impact of trading.
* William Drayton. "Thinking ahead - Getting smarter
about regulation", Harvard Business ~eview, July-Aug. IgBI,
pp. 38-~8.
** Drayton discusses some of these problems with respect
to EPA end clean sir regulations.
d, Firms may be concerned that pollution rights will
be spproprlsted by the government. (This is similar to the
concern that effluent charges mill be raised.- see above
under "Charges")
e. This approach may be difficult to explain to the
general public.
f. There will be costs - perhaps substantial - in setting
up end maintaining the apparatus for approvin9 and monitoring
trades. There will be considerable work in making sure that
objectives are not subverted.
Conclusions
Considering the advantages and disadvantages of the three
alternative methods of controlling pollution, it appears to me
that government-set .standards appear to be the most reasonable
alternative.
The market solution appears too difficult and costly to
implement in the current setting.
The effluent charge solution is appealing because it par-
tially utilizes the market to achieve optima. Ho~eve~, in the
case cf aquifer protection, ~hich is ne~ and ~hich must cover
many ne~ items and vast geographic areas, it may be easier to
control pollution ~ith regulations. These represent a continu-
ation of past policy.
Settin9 regulations on the disposal cf ~astes ~hich places
the responsibility for obtainin9 permission on the polluter enables
the regulato~ to obtain specific information to evaluate the
overall effect of that particular disposal. This ~ill not handle
all the p~oblems, but it eppea~s simpler than other alternatives.
As information is developed on various pollutants and the ability
of aquifers to accommodate them, decisions should be easier
(unless the information is mot clear-cut.)
Thus, at this time, the regulatory route appears the most
feasible. Although it is not the theoretically most efficient
system, it ~ill probably achieve reasonable results at lo,er
overall cost,