Requiring equal amounts of pollution abatement from different
polluters is inefficient when the different polluters have different
technologies of pollution abatement. Firm A is able to abate pollution
according to the marginal cost curve. Firm B has a different
abatement technology and has a higher marginal cost of abatement,
. Suppose a regulatory authority requires that the two firms reduce
pollution by the same amount,. Firm A will have a marginal cost of
pollution abatement of , whereas Firm B’s marginal cost will be
which is larger than.
To see that this outcome is inefficient, consider what happens if Firm A
increases its pollution abatement by one unit while Firm B decreases its -
abatement by one unit. Total pollution remains the same, but total costs
fall.
In this situation, consider a system of direct regulatory controls that
requires Firm A and Firm B each to reduce emissions by a given amount,
say. As shown in Figure 17-3 , Firm A’s marginal cost at
less than Firm B’s marginal cost. As long as is less than , it is
possible to reduce the total cost of this total amount of pollution
abatement by reallocating it between the two firms. For example, suppose
is $10 and is $18. If Firm A abated its emissions by one more unit
its total costs would rise by $10; if Firm B abated one less unit of
emissions, its total costs would fall by $18. By reallocating one unit of
pollution abatement from Firm B to Firm A, total emissions would be
unaffected, but the total cost of the abatement would be reduced by $8.
As long as the two firms’ marginal costs of abatement are not equal, it is
possible to reduce total costs by further redistributing the abatement
between the firms. Only when marginal costs are equal across the two
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