Question

Discuss control of stock pollutants. What condition must be met for efficient control? What condition must be met to insure that the stock does not exceed a given cap? Explain how emissions charges could in principle be used to achieve either of these goals.

Answer 1

A stock pollutant is defined as a residual waste that might accumulate over time. Market failure refers to the failure of the optimality condition. It means that in the case of market failure, the competitive market fails to allocate resources efficiently. Stock pollutants lead to negative externality. When the action of an economic agent creates costs for others but that cost is not borne by that economic agent, then there are negative externalities. In this scenario, there will be a divergence between marginal private cost and marginal social cost. As a result, there will be overproduction by competitive private firms.

The efficient level can be achieved by merging the firm which is creating pollution and the firm which is affected by pollution. In such a case, externalities are internalized. Before the merger, each firm has the right to produce whatever amount of pollutants regardless of what other firm does. But after the merger, the combined firm has the right to control the production of pollutants. Thus optimal level is achieved.

Another way to achieve optimality is by assigning property rights to either party. Suppose that price per unit of pollution is q and the property right is given to the firm that is affected by the pollutants. From this it follows that firm is facing social marginal cost. thus we have efficient market equilibrium. Under such condition stock will not exceed a given cap.

Emmision charges such as imposition of tax will ensure optimal level of pollutants. Firm producing pollutant is facing incorrect price for pollution. It costs nothing. This situation can be corrected by making sure that the firm is facing correct social cost. One way to achieve this is to impose tax on pollution. This kind of tax is known as pigouvian tax and it imply that the size of tax must equal to marginal external cost at efficient level. In this way our goal is achieved.