Visualizing Environmental Science

Environmental Economics 67

optimum amount of pollution. At this optimum, the cost to
society of having less pollution is offset by the benefits to
society of the activity creating the
pollution.
There are two major objections
to the economist’s concept of opti-
mum pollution. First, it is difficult
to determine the true cost of envi-
ronmental damage caused by pollution. The web of rela-
tionships within the environment is extremely intricate and
may be more vulnerable to pollution damage than is ini-
tially obvious, sometimes with disastrous results. When cost
estimates are highly uncertain, economics may lead to poor
decisions. Second, many people find the notion of putting
prices on lives, species, and wilderness to be unethical.

Economic Strategies
for Pollution Control

Command and control regula tions and incentive-based
regulations are two ways that gov-
ernments control pollution. To
date, most pollution control ef-
forts in the United States have
involved command and control
regulation. Sometimes command

and control laws require use of a specific pollution con-

trol method, such as the use of catalytic converters in

cars to decrease polluting exhaust emissions. In other

cases, a quantitative goal is set. For example, the Clean

Air Act Amendments of 1990 established a goal of a 60

percent reduction in nitrogen oxide emissions in pas-

senger cars by the year 2003. Usually, all polluters must

comply with the same rules and regulations, regardless

of their particular circumstances.

Economists are concerned that command and con-

trol regulations can have excessively high costs. They

argue that using economic tools can achieve the same

environmental benefits at lower cost. Consequently,

most economists, whether pro-

gressive or conservative, prefer

incentive-based regulation over

command and control regula-

tion. Ideally, incentive-based

regulation forces producers to

internalize external cost, thereby

achieving the optimum amount

of pollution.

The two most common incentive-based regulatory

approaches are environmental taxes and tradable per-

mits. Environmental taxes are designed to be equal to

the externality caused by a polluter. Unfortunately, this

amount can be highly uncertain and so is often very dif-

ficult to set. Tradable permit approaches, also known as

cap and trade, set an allowable amount of pollution and

then let different companies buy and sell the right to re-

lease that pollution. Companies or individuals who can

easily reduce their emissions sell some of their pollution

rights to those who cannot.

1. What is natural capital? How is economics
   related to natural capital?


2. Why are national income accounts incomplete
   estimates of total national economic
   performance?


3. How are marginal cost of pollution,
   marginal cost of pollution abatement, and
   optimum amount of pollution related?


4. How do command and control regulation and
   incentive-based regulation differ regarding
   pollution control?

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Economists identify the optimum amount of pollution as the
amount at which the marginal cost of pollution equals the
marginal cost of pollution abatement (the point at which the two
curves intersect). If more pollution than the optimum is allowed,
the social cost is unacceptably high. If less than the optimum
amount of pollution is allowed, the pollution abatement cost is
unacceptably high.

Amount of pollution (in tons of waste discharge)

Low High

Low

High

Cost per unit of waste (in dollars)

Marginal

cost of

pollution

Marginal cost

of pollution

abatement

Economically

optimum

amount of

pollution

optimum amount

of pollution The

amount of pollution

that is economically

most desirable.

command and

control regulation

Pollution control laws

that work by setting

limits on levels of

pollution.

incentive-based

regulation Pollution

control laws that work

by establishing emis-

sion targets and pro-

viding industries with

incentives to reduce

emissions.