CommandandControl Approach Chapter 4 Standards in Environmental Policy Government sets standards on environment Types of s tandards Ambient standard quality of environment to be achieved ID: 554184
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Slide1
Conventional Solutions to Environmental ProblemsCommand-and-Control Approach
Chapter 4Slide2
Standards in Environmental Policy
Government sets standards on environment
Types of
standardsAmbient standard – quality of environment to be achievedTechnology-based standard – equipment or method to be used to achieve some clean-up levelPerformance-based standard – pollution limit to be achieved with any technology
2Slide3
Evaluating Standards
Are standards
efficient
?Given some environmental objective, is that objective being achieved cost-effectively? Are standards the best way to achieve objective? Should we use some other method?Think about standards in terms of clean-up or abatement of pollution
3Slide4
“Right” = Efficient Standards
MSB
Abatement = MSCAbatementSlide5
MSB of Abatement
How much abatement do we want?
Whatever social gains we get as abatement goes up
Measured as reduction in damages or costs caused by pollution (i.e., reduction in MEC)Represents society’s demand for environmental qualityWhen abatement is expensive (high price), want less of itMSB is negatively sloped against quantity of abatement5Slide6
MSC of Abatement
How much does it cost to supply abatement?
Sum of all polluters’ marginal abatement costs (MAC) plus government’s marginal cost of enforcement (MCE)
MSC = MACMKT + MCE As more abatement is supplied, marginal increase in abatement becomes more expensiveMSC is positively sloped against quantity of abatement6Slide7
Firm’s Marginal Abatement Cost(typical shape)
7
$
Abatement (A)
MACSlide8
MSC of Abatement
8
$
Abatement (A)
MAC
MKT
MSC = MAC
MKT
+ MCE
A
1
MCESlide9
Efficient Level of Abatement
Efficient level of abatement (A
E
) occurs at the point where:Demanders have got enough abatement to satisfy their wants for environmental quality and Suppliers can provide this level of abatement at that price MSB of abatement = MSC of abatement9Slide10
Modeling AE
10
$
Abatement (A)
MSC
MSB
A
ESlide11
Abatement is not intuitiveA
batement = flipside
of environmental
qualityDemanding abatement is demanding a nice environmentSupplying abatement is supplying a nice environmentNice environment might be expensive11Slide12
Standards Might Not Be Efficient
1. Legislative constraints:
Policymakers not sensible
Some standards only look at benefits not costsSome standards exclude MCE2. Imperfect information:Cannot identify MSB or MSCMSB: people won’t reveal actual preferences (must save polar bear and must drive SUV)MSC: firms won’t give accurate MACs (catalytic converters)12Slide13
Standards May Not Be Efficient
3
. Regional differences
Even if AE is identified at the national level, it is not likely to be efficient at regional level13Slide14
Modeling Regional Differences
Consider two regions, X and Y, with same MSC of abatement
Suppose their MSB of abatement curves differ, with benefits of abatement valued more in region Y than region X
MSBX < MSBYEfficient level of abatement for region X would be lower than for region YSo national standard will not be efficient14Slide15
Regional Differences
15
$
MSC
X
= MSC
Y
MSB
Y
MSB
X
MSB
Y
= MSC
Y
A
Y
A
X
MSB
X
= MSC
X
A
A single national abatement
standard would not be optimal
for both regionsSlide16
Next Step
If standards are probably inefficient, we use
cost-effectiveness
to evaluate how standards are implementedRemember the two main options:Command-and-control: using standards or rules to control pollutionMarket: using incentives and market forces to motivate or encourage abatementThese differ in cost-effectiveness
16Slide17
Command and Control Standards
Consider two examples:
Technology-based
standard compared to a performance-based standardUniform standard compared to non-uniform standard17Slide18
Technology v. Performance Standards
Technology-based standards
specify the type of abatement method to be used
Potentially prevent firms from using least-cost abatement methodFirms might operate above their MAC curvePerformance-based standards allow firms to select an abatement method to achieve some performance
level
Profit-
maximizing firms will choose the least-cost method and operate
on
the MAC curve
18Slide19
Modeling Cost-Ineffectiveness
19
$
Abatement (A)
MAC
MAC represents least-cost
method of abatement
Technology-based standards
can force some firms to operate
above MAC
A
X
Technology-based
standard
Performance-based
standardSlide20
Uniform Standards
Uniform standards
: everyone has to do the same amount of abatement
Uniform standards not cost-effective if abatement costs differ among polluting sourcesCost savings possible if low-cost abaters do more cleaning up than high-cost abaters20Slide21
Example
Assumptions:
2 polluting firms in
same region (called firm 1 and 2)Each generates 10 units of pollutionGovernment sets emissions limits of 10 units of pollution for region, or 5 units per firmUniform standard: each firm must abate 5 units (AS1=5 and AS2=5
)
Costs
of each firm
:
21Slide22
Example
Assumptions:
2 polluting firms in some region (called firm 1 and 2)
Each generates 10 units of pollutionGovernment sets emissions limits of 10 units of pollution for region, or 5 units per firmUniform standard: each firm must abate 5 units (AS1=5 and AS2=5)
Costs
of each firm
:
Polluter 1:
TAC
1
= 1.25(A
1
)
2
MAC
1
= 2.5(A
1
)
Polluter 2:
TAC
2
= 0.3125(A
2
)
2
MAC
2
= 0.625(A
2
)
22Slide23
Find the total abatement costs using the uniform standard
Solution is easy: A
1
must be 5 and A2 must be 5TACs for each firm are:TAC1 = 1.25(A1)2 = 1.25(5)2
= $31.25
TAC
2
= 0.3125(A
2
)
2
= 0.3125(5)
2
= $7.81
Sum of TACs = $39.06
S
um is resources used to clean up the pollution
Could use that money for something else
23Slide24
Find cost-effective abatement level for each firm (A
C1
, A
C2)Solution: (1) Set MACs equal MAC1 = MAC2
2.5A
1
= 0.625A
2
(2) Make sure firms meet abatement standard
A
1
+ A
2
= Abatement Standard =10
(3) Solve equations (1) and (2) simultaneously
2.5 (10 - A
2
) = 0.625A
2
25 - 2.5A
2
= 0.625A
2
A
2
=8
Results:
A
2
=
8, A
1
=2,
MAC
1
= 2.5A
1
= 2.5(2) = $5.00
MAC
2
= 0.625A
2
= 0.625(8) = $5.00
24Slide25
P
rove that the uniform standard is not cost-effective
Three solutions:
(1) Find lowest TAC: With uniform standards, TAC = $39.06 Cost-effective solution, TAC = 1.25(2)2 + 0.3125(8)
2
= $25
Uniform standard imposes much bigger TAC (+$14.06)
(
2)
Show
with
MACs:
With uniform standards,
MAC
1
=2.5(5)=$12.50 and MAC
2
=0.625(5)=$3.13
5th (marginal) unit of A costs firm 2 less than firm 1 (by $9.37).
It would be cheaper if firm 2 did more of the abating (yet has no incentive to)
25Slide26
Graphical Solution
26
MAC
1
MAC
2
0
10
10
0
25.00
6.25
Polluter 1’s Abatement
Polluter 2’s Abatement
2
8
5.00
5.00
MAC
1
MAC
2Slide27
Problems
Public officials will
not
know where to set firm-specific standards without knowing MAC for every polluterImplies that a cost-effective solution is virtually impossible under CAC frameworkResult is possible using market approach27Slide28
Key IdeasAbatementIdea of standardsEfficient standard
Command and control version of standard
Why uniform standards are not cost
-effective28