17.1 The Economic Rationale for
Reducing Pollution LO 1
Pollution is a negative externality. Polluting firms and households
going about their daily business do harm to the environment and fail
to take account of the costs they impose on others.
In a market that produces pollution as a by-product, the external cost
of the pollution implies that too much of the good is produced
compared with what is allocatively efficient.
The allocatively efficient level of pollution is generally not zero; it is
the level at which the marginal cost of further pollution abatement is
just equal to the marginal benefit of pollution abatement.
If a firm or a household faces incentives that cause it to internalize
fully the costs that pollution imposes, it will choose the allocatively
efficient level of pollution.