Economics - Eliminating All Pollution Is Worse Than Bad

Topics: Externality, Supply and demand, Pigovian tax Pages: 5 (1546 words) Published: April 30, 2012

Topic: “While pollution is ‘bad’, eliminating all is worse than ‘bad’.”

Word Count:1150

Pollution has only become a global problem, or been recognised as a global problem in the last few years. The question at hand, of eliminating all pollution can be worse than 'bad', warrants validity as it would severely decrease the standard of living (and many other technological advances that make our life pleasurable) along with the goods and services provided by the polluters. It is not feasible to eliminate all pollution, nor is pollution purely a problem of industrial societies. The issue for economists is how to reach the optimal level of pollution as there is distortion interfering with the working of what is known as the ‘invisible hand’ (markets automatically channeling self-interest toward socially desirable ends). What must be discussed is the importance of government intervention and the notion of externalities caused by pollution. External costs produce one type of market failure and that market failure leads to inefficiency in the allocation of resources.

Society has to pollute at a reasonable level. We should not pollute past the assimilative capacity of the resources unless we find a technology that will clean up the pollutants. This can be extremely expensive; therefore, society must pollute at a quantity at which its total benefits exceed its total costs by the greatest amount possible. This occurs at a level where the marginal benefit of an additional unit of pollution equals its marginal cost. Marginal benefit refers to what people are willing to give up in order to obtain one more unit of a good, while marginal cost refers to the value of what is given up in order to produce that additional unit. Additional units of a good should be produced as long as marginal benefit exceeds marginal cost.

In the above graph, we can see that where the marginal social benefit (MSB) is equal to the marginal social cost (MSC) of environmental quality, we have an efficient level of pollution, Q*. This is the point after which the cost of an additional unit of pollution prevention exceeds the benefits to society derived from that additional unit of pollution prevention. For all units of pollution prevention from zero to Q*, the benefits derived from a one-unit increase in environmental quality exceed the costs. When companies (and individuals) who pollute do not bear the full costs of their pollution, their marginal private cost (cost of one more unit of environmental quality) is lower than that of society. As the level of pollution prevented goes up (move right in diagram), the marginal cost increases. This is because eliminating small to medium amounts of pollution may be relatively easy, but total elimination of pollution would cost considerably more. The marginal benefits curve also decreases at an increasing rate (moving to the right) showing that a small pollution reduction will be felt less if the environment is good, rather than if the environment is poor.

When a company pollutes, it produces what economists call a negative externality. This means that society has been negatively affected by the polluter (e.g. health risks or sore throats etc). This means that due to the externality, the social cost of producing the good exceeds the private cost. The socially desirable quantity of the good Qoptimum is therefore smaller than the equilibrium quantity Qmarket. Without some type of regulation, companies will not take all marginal social costs into account and will produce at a level that is damaging to the environment. The difference between these two curves reflects the cost of pollution emitted. This can be demonstrated in the diagram below.

To achieve maximum economic efficiency, government intervention must exist. In an unregulated market, producers don't bear the cost of the pollution which means they have no incentive to prevent it and the costs are passed on to society. This...

References: Websites:
Daniel Phaneuf, 2007, 'The Economics of Pollution Control ', Available:
Zac Mulett, 2009, ‘Consequences of the failure to incorporate negative externalities into energy prices’, Available:
Accessed 20 September 2011
Tim Haab, 2006, 'What we should do with pollution tax revenues? ', Available:
McHugh, A. 2007. Energy Economics Course Notes: Externalities. Murdoch University.
Harry Clarke (2011) “Some Basic Economics of Carbon Taxes”, Australian Economic Review 44: 2, pp 123-136
Hua Wang & David Wheeler (2003) “Equilibrium Pollution and Economic Development in China”, Environment and Development 8: 451-466
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