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By the end of this section, you will be able to:

  • Show how pollution charges impact firm decisions
  • Suggest other laws and regulations that could fall under pollution charges
  • Explain the significance of marketable permits and property rights
  • Evaluate which policies are most appropriate for various situations

Market-oriented environmental policies create incentives to allow firms some flexibility in reducing pollution. The three main categories of market-oriented approaches to pollution control are pollution charges, marketable permits, and better-defined property rights. All of these policy tools, discussed below, address the shortcomings of command-and-control regulation—albeit in different ways.

Pollution charges

A pollution charge    is a tax imposed on the quantity of pollution that a firm emits. A pollution charge gives a profit-maximizing firm an incentive to figure out ways to reduce its emissions—as long as the marginal cost of reducing the emissions is less than the tax.

For example, consider a small firm that emits 50 pounds per year of small particles, such as soot, into the air. Particulate matter, as it is called, causes respiratory illnesses and also imposes costs on firms and individuals.

[link] illustrates the marginal costs that a firm faces in reducing pollution. The marginal cost of pollution reduction, like most most marginal cost curves increases with output, at least in the short run. Reducing the first 10 pounds of particulate emissions costs the firm $300. Reducing the second 10 pounds would cost $500; reducing the third ten pounds would cost $900; reducing the fourth 10 pounds would cost $1,500; and the fifth 10 pounds would cost $2,500. This pattern for the costs of reducing pollution is common, because the firm can use the cheapest and easiest method to make initial reductions in pollution, but additional reductions in pollution become more expensive.

A pollution charge

 The graph shows the incentive for a firm to reduce pollution in order to avoid paying a pollution charge.
If a pollution charge is set equal to $1,000, then the firm will have an incentive to reduce pollution by 30 pounds because the $900 cost of these reductions would be less than the cost of paying the pollution charge.

Imagine the firm now faces a pollution tax of $1,000 for every 10 pounds of particulates emitted. The firm has the choice of either polluting and paying the tax, or reducing the amount of particulates they emit and paying the cost of abatement as shown in the figure. How much will the firm pollute and how much will the firm abate? The first 10 pounds would cost the firm $300 to abate. This is substantially less than the $1,000 tax, so they will choose to abate. The second 10 pounds would cost $500 to abate, which is still less than the tax, so they will choose to abate. The third 10 pounds would cost $900 to abate, which is slightly less than the $1,000 tax. The fourth 10 pounds would cost $1,500, which is much more costly than paying the tax. As a result, the firm will decide to reduce pollutants by 30 pounds, because the marginal cost of reducing pollution by this amount is less than the pollution tax. With a tax of $1,000, the firm has no incentive to reduce pollution more than 30 pounds.

Questions & Answers

what is demand
Prince Reply
what is market mechanism
thammy Reply
how do you find the marginal line given the input and output?
Greatson Reply
population density
Thompson Reply
what is monopoly
what is elasticity of demand?
tunde Reply
Elasticity is a central concept in economic , and is applied in many situations. Elasticity can provide important information about the strength or weakness of such relationship. Elasticity refers to the responsiveness of one economic variable such as quantity demanded, to change in another variable
such as price. #Price elasticity of demand:which measure the responsiveness of the quantity demanded to a change in price. #cross elasticity of demand:which measure the responsiveness of quantity demanded of one good to a change in the price of another good.
what are variables
Lekan Reply
marginal cost
Seyi Reply
division of labour
Abdulmumeen Reply
explain Qd=601/3p
mahmud Reply
what is unemployment
Ernest Reply
what is the formula for average revenues
please 7 implications of Lionel Robbins definition of economics
Amaka Reply
Problem of economics to the society
Gmzaeeyan Reply
Within 1 or 2 percentage points, what has the U.S. inflation rate been during the last 20 years? Draw a graph to show the data.
Daphne Reply
law of demand is explaining why the demand curve is downward sloping
Tan Reply
the graph would be x axis is quantity and y axis is price, as the price is expensive, there would be less demand therefore less quantity anf vice versa, thats why demand curve is downward sloping

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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