Figure 17-3 The Inefficiency of Direct Regulatory Controls
In the terminology of Chapter 12 , direct regulatory controls are often
not productively efficient because the total cost of achieving a given
amount of pollution abatement is not minimized.
Pollution is being reduced at the lowest possible cost when the marginal cost of pollution
abatement is the same for all firms.When firms are required to abide by the same direct pollution controls,
the marginal cost of pollution abatement is usually not equated across
firms. The result is higher total costs than is necessary. To see this,
consider two firms that have different technologies and thus face different
marginal costs of abating sulphur dioxide, a common pollutant emitted
from power plants and industrial facilities. The situation is shown in
Figure 17-3. These firms may be in the same industry, producing similar
products, or they may be in different industries altogether. In either case,
they are assumed to have different abilities to abate sulphur dioxide
emissions. Suppose that, for any level of pollution abatement, Firm A’s
marginal costs of abatement are lower than those for Firm B.