Maximizing the Net Benefits of Pollution

Read this section about how to apply the Coase Theorem to solve environmental problems.

1. Maximizing the Net Benefits of Pollution

Learning Objectives

  1. Explain why pollution can be said to have benefits as well as costs and describe the nature of these benefits and costs.
  2. Using marginal benefit and marginal cost curves, apply the marginal decision rule to show and explain what is meant by the efficient level of emissions and abatement.
  3. Explain the Coase theorem and what it implies about the conditions under which the private market is likely to achieve an efficient outcome.

We all pollute the environment. We do so not because we get some perverse satisfaction from polluting, but because activities that give us utility inevitably pollute. We do not drive our cars in order to dump carbon monoxide into the air but because we gain utility from the transportation and convenience cars provide. Firms pollute the environment if doing so allows them to produce goods and services at lower cost.

The benefits we derive from pollution are indirect. We obtain them from other activities that generate pollution. But that is not unusual - there are many things we do because of the other benefits they produce. Firms benefit from hiring labor not because their owners enjoy hiring workers but because those workers produce greater profits. We purchase electricity not because we enjoy the feeling of having the stuff racing through wires in the house but because the electricity produces light, heat, and other services more cheaply than would alternatives such as candles or fires. In purchasing this electricity, of course, we are demanding a good whose production inevitably degrades the environment. We pollute in the process of obtaining more of other goods and services we enjoy. We thus benefit from our pollution.

Of course, we suffer from the pollution we all generate as well. Smog-choked air damages our health and robs us of scenic views. We may not be able to fish or swim in polluted rivers. Just as the generation of pollution makes many of the activities we pursue less expensive, the fact that we have pollution increases many costs. Polluted rivers increase the cost of producing drinking water. Polluted air requires us to spend more on health care and to paint our buildings more often. Polluted soils produce less food.

Like any other activity, then, pollution has benefits as well as costs. The difficulty with pollution problems is that decision makers experience the benefits of their own choices to pollute the environment, but the costs spill over to everyone who breathes the air or consumes the water. These costs are examples of external costs. Recall that external costs produce one type of market failure and that market failures lead to inefficiency in the allocation of resources. The environment presents us with an allocation problem in which decision makers are not faced with all the benefits and costs of their choices. Environmental resources will not, in such cases, be allocated efficiently. Economists who examine and analyze environmental problems try to determine what an efficient allocation of the environment would most likely be - one that maximizes the difference between the total benefits and total costs of our pollution.

A second task of environmental economics is to find ways to get from where we are, typically with more pollution than is efficient, to the efficient solution. We have learned that private markets often fail to achieve efficient solutions to environmental problems because property rights are difficult to define and to exchange. We will see, however, that environmental economists have devised innovative ways to introduce property rights to environmental policy and to harness market forces to improve rather than degrade environmental quality.

Source: University of Minnesota,
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