Water & air pollution represents two of the main challenges facing society: what can economics offer to do about it?

By Ayan Banerjee

Pollution refers to activities that reduce the ambient quality of a particular environment (Ison, et al., 2002, p. 133). With growing levels of global pollution and its consequences becoming increasingly evident, its management and abatement have developed into one of society’s major challenges. Air and water pollution are an especially pressing area of concern since society’s high dependency on these fundamental human needs make its contamination especially impactful. Pollution abatement would consist of measures to reduce, eliminate or control the pollution for a given environment (Moosa & Ramiah, 2016, p. 130). The application of economic instruments can provide various approaches to this problem. This essay will describe and evaluate the effectiveness of these options.
 
Air pollution can most often be grouped into two clusters: mobile and stationary sources. Although they emit many of the same pollutants, they require different economic instruments to effectively be abated.
 
Firstly, the mobility of the source of air pollution has two main impacts on abatement policy. Pollution can be caused by the temporary location of a source – such as rush hour in urban areas – and since they are mobile, sources cannot be relocated as would be done with an electric power plant (Tietenberg & Lewis, 2014, p. 480). Additionally, it’s challenging to ‘tailor’ emissions rates to a confined pollutant pattern as any specific source can end up in numerous locations during the course of its life. One economic approach would be the use of implicit subsidies. Often the private costs associated with a pollution-creating activity do not reflect the social cost. For example, since only a minority of the road construction costs are funded by fuel taxes, there is a discrepancy between the marginal private cost of an additional mile driven on the road and its social cost (Tietenberg & Lewis, 2014, p. 482). These non-internalised social costs are therefore incorporated into free markets through the use of implicit subsidies. The government executes these subsidies by ‘suppressing’ supply which raises prices which would reflect the higher ‘true’ cost of these goods or services. Overall, this approach, especially effective for mobile pollutant sources, would reduce the demand for these pollution creating activities, thus, abating some negative environmental impacts.
 
Stationary-source air pollution is susceptible to abatement from these measures as well as some additional approaches. The most common one being the Pigouvian tax. These taxes are on the producers of an externality which is equal to the net marginal external cost imposed (Ison, et al., 2002, p. 105). This would affect the producer of vertically shifting their supply curve reducing the equilibrium quantity of the good or service supplied.

As illustrated above, the tax level is aimed to be when the marginal benefit of the good or service equals the marginal damage to society. This is the most common method of internalising an externality. Furthermore, this is argued to be fairer as it follows the ‘polluter-pays’ principle embraced by the OECD since 1972 (Ison, et al., 2002, p. 83). Furthermore, Pigouvian taxes are more likely to yield a double dividend where the economic costs associated with a taxation system can be outweighed by government spending using the revenue generated. This system can easily be appropriated with regards to water pollution if the producer can be identified. The major drawback of this abatement approach is that the producer has to be identifiable and also taxable. For example, air and water pollution can be difficult to identify its source as has the potential to diffuse great distances. Overall, Pigouvian taxes are a versatile approach to pollution abatement for both the air and water, however, its drawbacks are stem from identifying the sources of pollution. 
 
Water pollution in many ways is similarly dealt with as air pollution, however, the economic instruments used are more unique to these specific pollution sources. Water pollution can either stem from point or non-point sources. Whilst point sources can be treated very similarly to stationary-source air pollution with instruments such as Pigouvian taxes and Implicit subsidies; non-point sources are harder to identify, so new policy approaches must be employed. ‘Watershed-Based Trading’ most notably applied in 1996 when the EPA issued the ‘Draft Framework for Watershed Based Trading’ (Tietenberg & Lewis, 2014, p. 530). This operates through point source polluters meeting water quality criteria by buying reductions from other point or nonpoint sources that would have lower marginal costs of abatement. They would usually trade different pollutant abatements mainly either phosphorus or nitrogen. This would further allow firms to exploit economies of scale for pollution-abatement technology which will reduce the overall cost to markets and create faster, cheaper clean-up. Conversely, this approach is very complicated and involves accounting for the distribution of pollutants to derive accurate trading ratios that ensure pollution reductions after trades illustrate the required abatement. Another policy approach would be a consent system (Ison, et al., 2002, p. 139). This is very simple as it states that pollution emitted cannot exceed a certain determined level. Many economists criticise this as they believe a tax system can achieve a similar level of abatement at a lower total cost. Furthermore, it eliminates the chance of a double dividend as there is no tax revenue but only expenditure to enforce the max level of pollution. 
 
In conclusion, subsidies, taxes, trading and consent systems are all appropriate policy options based on economic theory. They vary in effectiveness depending on the assumptions and constraints of each method. Many rely on being able to identify the source of pollution and therefore are often liable to not working fully efficiently. However, overall economics can provide several useful policy approaches outside of command, control and institutional instruments.
 
 
Bibliography
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Park, C. C., 1986. Environmental Policies: An international review. 1st Edition ed. Australia: Croom Helm Ltd..
Tietenberg, T. & Lewis, L., 2014. Environmental & Natural Resource Economics. Ninth Edition ed. England: Pearson Education Ltd..
Wills, I., 1997. Economics and the Environment. 1st Edition ed. Australia: Allen & Unwin.