Our environment of late has become a scarce resource. Economics being a discipline concerned about effective utilisation and distribution of scarce resources is therefore vital when addressing environmental problems. When formulating environmental policy, economics comes into play with the aim of balancing the costs and benefits of the environmental measures. In this essay, I will discuss air pollution as an environmental problem and the economics involved in addressing it.
Air pollution and Trends in the last 20 years
According to EPA there are six major pollutants that determine air quality. They include: lead, carbon monoxide (CO), nitrogen dioxide (NOx), sulphur dioxide (SOx), particulate matter, and ozone.
Figure 1: Percentage of Primary Air Pollutants
Since measures of controlling the pollutants were introduced by EPA, decrease of pollutants in Air of USA were recorded. In the case of CO, the national levels have been recorded to decreasing since 1990 when the concentration was 10ppm. In 2009, the data obtained was 2.5ppm (EPA, 2010). NOx has also been shown to decrease with a rate of 40% in between the years of 1990 to 2009. The national average of SOx in USA has been on the decrease over the last 20 years at a rate of 65%. Ozone has been fluctuating and has the least decrease rate of 21%. Lead a very poisonous toxic metal has been drastically reduced through EPA measures recording 73% decrease rates. Particulate matter also decreased by 28%. The data listed above were all sourced from EPA.
Figure 2: Statistics of Particulate Matter in US
Externalities of air pollution
The three externalities of air pollution are costs economically, environmentally, and socially. Air pollution is a negative externality since the cost to the society is more than that the consumer pays for it (Cropper et al., 2011). The graph below shows a negative externality where the black line shows marginal cost curve of a firm or industry with the negative externality faces. The red line shows the marginal cost, or supply curve of the society. The optimal production quantity is Q while Q* is the result of negative externality. Grey part is the deadweight welfare loss.
Figure 3: Negative Externality Graph
In terms of Economics, there are loses due to property and infrastructure damage, low yields in farms, and lower productivity of people in work settings (Atkinson & Morton, 2004). For instance, particulate emissions, SOx, or NOx can cause acid rain that corrodes buildings and infrastructure. This is a loss to owners who spend a lot in renovations and replacements. In case of workers in the work place who are exposed to a pollutant such as lead, there is a threat of loss of man-hours when labourers seek treatment, hence causing loss of revenue for companies. In agriculture, quality and quantity of crops and timber products are affected; therefore there is lower produce and income for farmers.
Socially, air pollution can cause physiological impacts such as cardiac and respirational systems. For instance, many people living in urban areas are exposed to air pollution. These people run at a risk of contracting respiratory diseases such as lung cancer and asthma, therefore incurring medical costs. Air pollution also affects the society in that life expectancy would be lowered.
Environmental costs are negative impacts to the environment due to air pollution and do not include that which is economically beneficial to human beings. For instance, air pollution disturbs the ecological system hence reduction of diversity and sustainability (Atkinson & Morton, 2004). These costs are generally difficult to measure but can be felt as result of changes in the biodiversity (Atkinson & Morton, 2004).
Measurement of policies to reduce air pollution
Policies to reduce air pollution can be categorized and measured in terms of monetary value, climatic conditions, health impact, and absolute air emission reduction (Cropper, Hammit & Robinson, 2011). Monetary value is difficult to determine, but an economists must rely on the measurements from different professional involved so as best practices that are efficient, cost saving and effective are employed. For instance, in creating the policy to reduce particulate emissions from vehicles, economist must factor in vehicle manufacturers and population driving vehicles.
Climatic conditions can be factored in when measuring policies to reduce air condition (Cropper et al., 2011). The climatic aspects include temperature, rain, and wind can be measured for emission content and from which comparative analysis carried out to determine the effectiveness of a certain policy. Therefore, the climate is determined by the level of pollution.
The impacts on health can be measured by evaluating the mortality rates, valuing reduction in illness rates, calculating the value of a risk of death, and valuing reduction in premature mortality rates (Atkinson & Morton, 2004). However, not all deaths can be attributed to pollution. Therefore, for example one can evaluate the percentage decrease in mortality after a reduction of pollution. A reduction in ailments resulting from air pollution such as lung cancer, asthma, chronic coughs, and heart diseases would be evident.
Lastly, the level of global warming can be measured over a certain period to determine if the emissions have reduced. It is posited by many researchers that air emissions are the major cause of global warming; hence a decrease in global temperatures signifies lesser emissions. Furthermore, reducing emission is estimated to decrease the level of global warming by at least 15% (EPA).
Measuring cost of reducing the problem
First, we have alternative empirical cost estimation method. This includes the costs a firm incurs in purchasing and maintenance of equipment that assist in abatement of pollution, plus the costs a government incurs when formulating and enforcing policy on pollution. This method is ideal when behavioural responses, transitional costs and other indirect costs are minimal (Moore, Boardman, and Greenberg, 2004)
Second, general equilibrium cost estimation method, which basically allows for the inclusion of behavioural responses to changes in public policy. Under this method, there are two types of equilibrium; general and partial. Partial examines compliance costs factoring in responses of behaviour through considering market forces of demand and supply, with an assumption that the impact of regulation are confined in a single or more markets. This method works best given the situation that the markets to be affected by the policy are generally small related to the whole economy. In general equilibrium, also called cost-estimation method, both input-output models and computable general equilibrium models are considered. Input-output analysis measures the flow of goods and services in an economy using fixed coefficient relationships. However, this method is limited on its application by restrictive assumptions of constant returns to scale, fixed prices, fixed manufacturers, and consumer trends and practices (Moore et al., 2004).
Benefits and costs of dealing with air pollution.
Charge systems: In the US, the government introduced a charge system, where firms are charged a fee in relation to the amount of pollution it generates. Therefore, firms make efforts to reduce pollution with an aim of paying an amount equal to the tax rate. However, determining the tax rate has been a herculean task. Ideally it should be set equal to the marginal benefit of clean-up at the efficient level of clean-up, but the government technocrat’s sets policy in relation to a desired level of clean-up, oblivious of the fact that the firms may respond differently to a taxation policy (Moore et al., 2004). This approach is commonly pounced in municipal authorities who charge residents and business people for incremental costs of solid waste. In this system, clients pay in accordance to the waste they produce. These measures have led to the reduction of waste generated. Another common charge system in USA is the refund system. It is where, clients pay more if they bought products that were potential pollutants, and at the same time refunded money when they recycled the products.
Tradable permits: In this system, a certain limit of pollution is allowed and marked. Firms are granted those limits in terms of permits. Allocated companies then strive to maintain the granted limit as low as possible so that they can transfer the permit to other operations, or sell to other companies. Examples of tradable permits are the Reclaim program in Los Angeles metropolitan region and CFC Trading (Moore et al., 2004).
Market friction reduction: This policy instrument can be divided into two distinct policies. First, liability rules, which mean that companies are motivated to analyse all potential environmental harms of their resolutions. For example, the Comprehensive Environmental response, Compensation, and Liability Act. This law established liability for firms that are found to be responsible for the existence of areas with toxic wastes. Second, reporting requirements, increasing the public awareness of firm’s actions, and activities. A good example is the US Toxic Release Inventory (TRI), which requires a firm to disclose to the public on use, storage and release of hazardous materials.
Government Subsidy Reduction: Subsidies provide a good incentive to address environmental anomalies. For instance, the government has responded to the global climate change, by giving Federal incentives that promote use of fossil fuels.
Role of market based controlled policies
First, the cost of arresting pollution differs among various sources, in that; a market based system tends to have greater gains in relation to command and control regulations (Cropper et al., 2011). Second, if a market system is promising in terms of established uniform standard, then the probability of blending all pollutants in a given air shed is greater. Third, tradable permits function best when trading costs are low, and if designed properly, private markets will also make trading costs low. Fourth, it is imperative to note that marginal trading costs, if all factors are constant, result in mean abatement costs of tradable permit system become independent of initial allocations.
Determining the appropriate discount rate
It’s rather difficult selecting a discount rate to be used in analysis, mostly due to the fact that impacts are spread across a large duration involving more than one generation. However, the social-discount rate is derived by getting an average of distinct time preference rates of the affected by policy. “Evidence from market behaviour and from experimental economics indicates that individuals may employ lower discount rate for impacts of larger magnitudes, higher discount rates for gains and for losses, and rates which decline with the time span being considered” (Moore et al., 2004, p. 792).
Air pollution just like other forms of pollution is rampant all over the universe. Its impacts cut across all areas the environment unlike, noise or water pollutions that affect particular areas of the environment. Emphasis should be put by the government, businesses and the households in reducing the generation of pollutants. The government should play a crucial role in providing policy and at the same time supervisory role.
Atkinson, S. E. and B. B. J. Morton (2004). "Determining the Cost-effective Size of an Emission Trading Region for Achieving an Ambient Standard." Resource and Energy Economics 26(3): 295-315.
Cropper, M., Hammit, J.K., and Robinson, L.A. (March, 2011). Valuing Mortality Risk Reduction: Progress and Challenges. Washington DC: Resources of the Future. Available at:
Moore, M, A ., A. Boardman, and D. Greenberg (2004) ‘’Just Give Me a Number! Practical Values for the Social Discount Rate’’, Journal of Policy Analysis and Management 23 (4): 789-812