k

1. Economics of Externalities and
Pollution Abatement
• Side effect of economic development:
• (a) Global warming.
• (b) Depletion of the ozone layer.
• (c ) Acid rain.
• (d) Environmental pollution – Adversely
affect – Water, fish etc.
• - Irrigation and power project – Poor not
receive proper compensation, rehabilitation
etc.

2. Definition of externalities
• Externalities are unreimbursed costs or
uncharged benefits accruing to people as a
result of someone else’s action.
• - No market for environment- Negative
externalities.
• - Minimize the economic welfare losses
associated with externalities. ( Pesticides,
watershed mgmt., ground water fisheries etc.)

3. Three practical questions
• (a) To what extent can pollution be reduced
cost effectively ?
• (b) Are economic instrument of
environmental policy more effective than
regulation?
• (c ) Do pollution abatement policies have
adverse effects on the balance sheet of the
concerned firms and the economics of
their countries.

4. • Abatement (not use control) – because
complete prevention of pollution may
not be feasible nor economically viable.
(Pollution to minimum standard).
• Traditionally- Economist focus on point
pollution than dispersed pollution.
• - Difficult to assess – Disposed

5. • Pollution, noise pollution.
• Chemical composition – excess,
wrong time, without proper
precaution.
• Use of pesticides and fertilizers-
extent and timing of their
application.
• Heavy rains – fertilizer used- leached
into groundwater.

6. Externalities as Market failures
• Market allocation under externalities- diverges
from that under perfect competition – creating
welfare loss to safety.
• Investor impose external cost
• - Marginal private cost and marginal private
benefit.
• Example – Industrial pollution – neglecting soil
cost.
• Social cost
• Fig. 7.1

9. The optimum level of pollution
Abatement
• MISC – Marginal social cost
• MPC – Marginal private cost
• MEB – Marginal external benefit
• SD – Social demand
• PD – Private demand
• Fig 7.3

11. Externalities and property Rights –
The coasion approach
• Externalities – result from incomplete
property rights property rights are
neither exclusive nor completely
specified.
• Example – Factory and laundry – both
owned by per person

12. • - Adjust the level of output for max.
combined profit.
• Ownership is separately – difficulties in
negotiation (bargaining).
• Coasian market solution –
• MMPB – Marginal net private benefit.

14. Pigouvian Taxes and subsidies to
internalize externalities
• Pigou’s – Product must compensate parties
who are affected by the negative
externalities.
• Tax – MPC + Tax = MSC
• Tax – How and to what extent the tax is
imposed reduce the externality to tolerable
limit.

15. Subsidy to producers
• Designing taxation guidelines:
• Final products
• Pollution emission – controlling and
monitoring
• Regulatory versus market oriented approaches:
• Water( preservation and control to pollution ) act
of 1974.

16. • Air ( prevention and control pollution )
act of 1981.
• Environmental protection act – 1986
• - Specify pollution standard.
• - Penalties for no compliance.
• Taylor ( 1993 ) – Anti pollution publicity
campaigns- educate people.

17. Alternative Approaches
• Combining taxes, regulations and
property rights
• taxes – per unit basis
• Mission: 1) Reducing externality from
industrial smoke pollution.
• 2) Reducing industrial output.
• 3) Smoke reduction equipments.
• 4) Industry away from population
centers.

18. Marketable permits
• Regional pollution standards:
• Permits can be traded among users low
cost of pollution abatement can sell their
extra pollution allotment to those with
high costs.
• Pollution abatement burdensome:

19. • According to comprehensive industry
document – 1984
• Annual burden of treatment is less than 1%
of annual turnover ( sugar, oil refineries,
synthetic fibers, breweries).
• Between 1 to 2% - textile industries
• 2-3 % in fertilizers.
• Over 3% in pesticides and pharmaceuticals.

20. Distillery industry
• The Molasses – based industry in
highly water polluting.
• Increase BOD, COD and soluble solids
(ss) – major forms of pollution.
• New technology – recycling distillery
wastes and converting them into
energy.