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Pollution can be controlled with less government regulation.

IN MANY RESPECTS, a clean environment is no different from any other desirable commodity. In a world of scarcity, people can increase consumption only by giving up something else. The dilemma they face is choosing the combination of goods that enhances well-being the most. Few would enjoy a perfectly clean environment if they were cold, hungry, and generally destitute. On the other hand, an individual choking to death in smog hardly is to be envied, no matter how great his or her material wealth. Only by considering the extra cost as well as the additional benefit of increased consumption of all goods, including clean air and water, can decisions on the desirable combination be made properly.

It is practically impossible to get widespread agreement on what the appropriate level of pollution should be. People with their own preferences and situations are going to have different ideas about the costs and benefits of pollution abatement. For example, consider a community which contains both a college and an oil refinery that emits large quantities of nauseating and potentially noxious fumes into the atmosphere. Who do you think is most likely to participate in a protest favoring stringent pollution controls on the refinery: college students or townspeople? It is a safe bet that the answer is the collegians. This might be because they are more aware of and sensitive to the environmental quality of the community, but the long-term residents--those who plan on staying there and raising children--certainly are worried about its air quality. Indeed, they well may be more concerned about local pollution than the college students who, after all, will live in the community only while they are attending school.

The difference between townspeople and students probably is not found primarily in a dissimilarity in desire for a clean environment. It likely is explained best by the fact that the expense of cleaning up the environment will fall almost entirely on the townspeople. It is their jobs, incomes, and retirement plans that will be jeopardized by strict pollution control requirements on the refinery. The students will not have to pay this cost, since their job prospects and current income will be quite independent of the plant's profitability. Consequently, it is the students who will be more eager to clean up the refinery. They will get many of the benefits and pay none of the cost. The townspeople will be a little less enthusiastic about environmental purity since they will be the ones stuck with the bill.

The point is not to decide which group is right or wrong. Both are quite rational, given the situation they face. The purpose is to emphasize that controversy is sure to arise when a community of people have to share a common, or public, good. Conflicts are inevitable because individuals have varied preferences and face different costs. This explains much of the controversy revolving around environmental issues. If everyone could pay for and consume a preferred level of environmental quality, independent of that paid for and consumed by others, controversy over ecological protection would disappear. There is no way to avoid this type of dispute completely when, as always will be the case, public goods are being provided in a community. It should be recognized, however, that one way people somewhat spontaneously moderate such contentions is by sorting themselves out in relatively homogeneous groupings. Communities that contain residents with similar backgrounds, preferences, and circumstances are more likely to avoid socially divisive controversies than are those containing more diverse populations.

What would be the objectives of an ideal pollution control policy? First, and most obviously, it should be reduced to the efficient level that maximizes the value of all resources. This means continuing to cut pollution one more unit only as long as the value of the improved environmental quality is greater than that of what is sacrificed.

A second aim is to lower it as inexpensively as possible. There are two separate considerations here. If the process is to be done economically, each source obviously has to abate at minimum cost. There are many ways to cut back on pollution, but in general there will be only one least-cost method. Even if all polluters are abating as cheaply as possible, it does not necessarily mean that the over-all problem is being reduced at least cost. Since some will be more efficient at reduction than others, the lowest-cost pattern will require certain polluters to clean up more than others. In general, the least-cost pattern of abatement will find the price of lessening pollution by one more unit the same for all polluters. If this condition is not satisfied, the expense of achieving a given amount can be cut by having the low-cost abater reduce pollution by an additional unit and the high-cost one do so by a unit less. This type of adjustment will continue to decrease cost, without increasing pollution, until reducing pollution the additional unit runs everyone the same.

A third aim is to establish incentives that will motivate advances in pollution abatement technology. Over the long run, this probably is even more important than the first two. For instance, the expense can be reduced significantly over time, even if the second goal is not realized fully, if consistent strides are made in the technology of pollution control.

It should be clear that these three objectives never will be accomplished entirely. By not being able to own and control identifiable and separate portions of the atmosphere, for example, no one is in a position to require that a price be paid in exchange for fouling his, or only his, clean air. Without such exchanges and prices, there is no way of knowing the value people

place on clean air. Without this information, the efficient level of air pollution can not be determined. Likewise, private ownership of identifiable and separate portions of water in our lakes, rivers, and oceans is not possible. Thus, there is no accurate way of determining the efficient level of water pollution. In the absence of market exchange, we have to rely on the political process to establish it. In a democratic society, there is the presumption that the information provided by voting and lobbying will keep the political process responsive to the preferences of the citizens. To the extent that this presumption is justified, there is hope that decision-makers will arrive at a level of pollution that is not too far removed from the efficient one.

Purchasing pollution rights

Since the target level of pollution is determined politically, it is necessary to focus on the second and third objectives of a pollution-control policy. Economists see an opportunity to realize these aims reasonably well by having the government create and enforce a system of property rights in the use of the environment as a waste-sink. Without going into a detailed discussion of implementation problems, the idea simply is to have the government issue transferable pollution rights that give the holder permission to discharge, say, one unit of pollution each week. The total number of rights granted would allow only that level of pollution determined to be appropriate by the political process. It is obvious that the scheme, assuming adequate enforcement, would serve to limit pollution to the politically accepted level. Also, each polluter--having to reduce fouling the environment to the level allowed by the number of rights held--will be motivated to do so at the minimum cost. The crucial advantage in this approach comes from the fact that the rights are private property and can be sold.

Because they are transferable, a market will develop for them, and the resulting exchanges will determine a pollution-right price. This cost of discharging another unit per week now is equal to the price of the right--the value others place on the ability to increase their pollution by one unit every seven days. In other words, people will be motivated to increase their use of the environment as a waste-sink only if the additional pollution benefits them at least as much as it would avail others. A pattern of pollution activities results that maximizes the value realized from the allowable amount of contamination.

It is worth emphasizing that this least-cost system of pollution reduction does not require any information on the part of the Environmental Protection Agency. The EPA does not need to know the least expensive strategy for each and every polluter. Faced with a positive price for these rights, each polluter has every reason to discover the cheapest method to reduce and utilize pollution. Neither does the EPA need to know anything about the differences in abatement costs among polluters. Each will be motivated to curb pollution as long as the cost of reducing one more unit is less than the price of rights. With all facing the same market price, this results in the cost of abating one more unit being the same for everyone. The information and incentives generated by private ownership and market exchange automatically lead to the desirable pattern of pollution reduction.

The rights approach also will create an impetus for polluters to come up with improved abatement technologies. American economic history is full of examples of technological development that have allowed more output to be produced with less land and labor. Conspicuously absent have been processes designed to conserve on the use of the environment as a waste-sink. Market prices on land and labor always have provided a strong incentive to conserve these resources. The absence of prices for the use of our atmosphere and waterways, however, made it privately unprofitable to worry about conserving their use. Marketable pollution rights would remedy this neglect.

Involving outside groups

There is another possible advantage to this approach that is worth discussing, but which is not as significant an advantage as it may seem at first. So far, the presumption is that the only reason for purchasing rights is to support a polluting activity. However, they also could be bought to keep them out of the hands of polluters, thereby reducing pollution. For instance, groups interested in protecting the natural environment--such as the Sierra Club, Friends of the Earth, National Rifle Association, and Audubon Society--would have the opportunity to put some of their funds to direct use in reducing pollution by purchasing and hoarding rights. If everyone who valued clean air could be depended upon to contribute toward such purchases, the price of these rights would reflect their value in providing a cleaner environment. In this case, if more rights were issued than was consistent with the efficient level of pollution, the excess would be bought and hoarded. This approach would result in an efficient level of pollution as well as the least-cost pattern of reduction.

Unfortunately for such a scheme, there is little reason to expect people, regardless of the concern they may express about the environment, to buy rights to prevent pollution. Doing so to curb air pollution, for example, reduces it for everyone in the area, not just for whoever makes the purchase. So, the total value of the reduced pollution is much greater than that realized by the individual who pays for it. Consequently, the value of keeping rights out of the hands of polluters easily could be greater than their market price, and no one individual likely would be willing to buy one for that purpose.

Of course, individuals could band together for the collective purpose of contributing toward the purchase of pollution rights, but recruiting people into such a cooperative effort would not be easy. Each person would recognize that, unless others joined the effort in large numbers, an individual contribution would do little good and would cost more than it was personally worth. On the other hand, they also realize that, if many people contribute, they will be able to benefit as free riders from the clean air that others buy. Either way, individuals can see a personal advantage in not contributing to the common cause.

This is not meant to imply that the desire to reduce pollution will motivate no purchases of rights. Environmental organizations exist that, to some degree, have overcome the free rider problem, and such groups likely would buy and hoard some rights. Nevertheless, it would be naive to believe that such purchases would come close to reflecting the full social value of clean air if the government issued rights in excess of the amount needed to support the efficient level of pollution. The best that can be hoped for is that the number issued will allow something close to the efficient level when they are bought only for the purpose of polluting. Even without reduction purchases motivating the efficient level of pollution, the minimum abatement cost feature of the rights approach still should make it a very attractive means for controlling the problem. This is particularly true given the alternative of having the government directly regulate and control pollution sources.

The direct regulation and control approach has the government determine an acceptable level of pollution and then attempt to achieve it by requiring individual polluters to reduce their discharges by specified amounts and/or by mandating the use of particular abatement technologies. In determining the acceptable over-all level of pollution, this scheme is on an equal footing with the rights approach. In both cases, the acceptable level is determined through the political process. However, direct regulation and control can not be expected to achieve the required effect as cheaply as will a market in rights. Not knowing the least-cost abatement approach for each pollution source, the government agency charged with control generally will require a uniform approach across each class of polluters, despite the fact that the most appropriate plan will vary from source to source. Neither will the government have the data necessary to determine the least-cost reduction pattern. In the absence of market exchange, this information effectively is unknowable.

Despite the fact that environmental policy in the U.S. has taken the direct regulation and control approach almost exclusively, there has been a slight shift in the direction of more flexibility and reliance on market incentives. For example, the EPA recently has moved toward what has become known as the bubble approach. Rather than specifying the amount of pollution allowed from each source within a plant or industrial complex, a hypothetical bubble is placed over the area. It is the overall level generated within this bubble that the EPA controls. This gives the polluter the needed flexibility to adjust the contamination from each source in such a way that the costs of control are minimized subject to the over-all restriction on emissions within the bubble.

From the bubble concept has come the possibility of buying and selling pollution offsets. Assume that a firm wants to move into an area that already is as polluted as allowed by EPA standards. It can set up operation by purchasing offsets from an existing polluter in the area. This allows a company that believes its new polluting activity will generate more value to transfer pollution from existing bubbles to a new one. This type of exchange, much like swapping rights, allows the greatest value to be generated with a given amount of pollution. It also encourages polluters to come up with cheaper ways of reducing the condition, since the firm that does so is able to sell the credit to others. Pollution reduction can be profitable.

Although the pollution market still is in its infancy and many legal considerations are yet to be resolved, some offset exchanges have taken place. The Times Mirror Company completed a $120,000,000 expansion of its paper plant in the Portland, Ore., area after purchasing the right to discharge an additional 150 tons of hydrocarbons annually from other polluters. Mobil Oil paid Torrance, Calif., $3,000,000 for rights to dump 900 pounds of reactive vapors daily. Under the Clean Air Act of 1990, electric utility companies can buy or sell the rights created by pollution regulation.

Despite the advantages of rights and offset exchanges, the political response to ecological concerns almost entirely has been to embrace the direct regulation and control approach. There are reasons for the political popularity of directly regulating pollution sources that have nothing to do with environmental concerns. In some cases, the latter simply are a convenient vehicle for promoting hidden agendas that actually can result in a reduction in environmental quality.
COPYRIGHT 1993 Society for the Advancement of Education
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Author:Lee, Dwight R.; Sexton, Robert L.
Publication:USA Today (Magazine)
Date:Mar 1, 1993
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