The demand and supply for Environmental quality:
Demand or Damage curve
- Environmental quality is considered a function of society’s economic.
- The demand for any particular good is related to its price or cost to beneficiary
as environmental quality.
- The amount a community would be willing to pay to make a slight (marginal)
improvement in the air quality will be equal to the decline in damage costs due
to that improvement (Fig. 2., a.2.b).
- Price in improvement in environment = value of improvement to society.
- Current research in this area involves estimating damage functions or curves
and then interpolating a demand curve from such estimates.
Societal Demand Curves in a heterogeneous Community.
- The basis of estimating the demand curve for environmental quality is that it
based on interpolating.
- Most of the environment fit within a public good or common property
- Since nonpayer cannot be excluded, the only solution is that such goods be
- The society or community demand curve is a collective demand curve and
consider to be homogeneous, and the problem will be minimized.
- Individual demand curve = community demand curve.
- Societal demand price at any level of pollution = individual X number.
- Pollution or environmental degradation does not contain itself to homogenous
characteristics in realistic world as individual demands are not identical.
Hence measuring a social damage curve is extremely difficult.
- Any community demand curve or function must invariably be the creation of
some political process, as the outcome is that when decisions are implemented,
some individuals will be paying a higher price for environmental quality,
while other gain more than they pay.
- Anti-environmental sentiment”.
The costs of Pollution Abatement
- In order to complete any analysis of correct or optimum allowable pollution
level, one must know what the supply curve of environmental quality looks
like. “Marginal social opportunity costs are of improving environmental
- Social opportunity costs: goods and services that the society must give up to
achieve an improvement in environmental quality.
- Costs of pollution control devices
- Abatement cost
- Total costs of pollution abatement rises and similar to demand a supply for
environmental quality (Fig. 2-3).
- Technology advancement and time.
- Time Factors “short-run and long-run”. Six months or two years.
Who bears the burden of Abatement Cost
- Cost or supply curves are useful analytical tools for decision maker. However
they ignore the equity consideration that the decision maker face.
- The need to look for “hidden cost”, “who pays the burden”.
- General equilibrium models that ties consumers and industries.
- Current models are complex and relatively crude, as dealing with different
states of the economy (consumer, producer, labor).
- It is clear that costs are widely spread throughout the economy, making them
hard to identify.
Achieving The Social Optimum
Demand and supply and Minimum Social Costs:
Marginal Benefits = Marginal Costs
- Figure 2 – 4
- Total abatement costs or total environmental damage have no relevance with
regard to the optimal level of pollution.
- If the marginal cost of pollution abatement is greater then the marginal
benefits, this indicates that we have gone too far in our clean-up efforts.
Initial Empirical Findings
- Estimating cost and demands Functions is not easy tasks.
- For complete analysis it required to have estimates for major polluting
industries and for each form of residual pollutants.
- However, at present not enough detailed analysis exists for policy makers to
actually estimate the reasonable “optimal” amount of allowable pollution for
any particular type. “No longer this is statement is valid”.
- Given the varying environment empirical studies may have been conducted on
a replicate basis for all sub regions of a local area.
- Standard analytic procedures.
Alternative policies to Achieve the optimum
- Variety of techniques has been considered for ameliorating the environmental
- Space limitations do not allow for either a comprehensive discussion of all
possible policies or detailed description of those chosen for discussion.
- The notion of a “standard” itself creates all sort of problems, as it require of
obscuring “Q” that achieves the optimal level of pollution.
- Current applied standard has been based on “no perceivable damage” concept,
but not indicate “Zero Pollution”.
- Standard are generally applied informally across firms, industries and regions.
Given differences in real costs and demand function, this will lead to non-
optimal resources allocation.
- Type that requires the use of the “best method” available given the current
state of technology.
- Direct controls often stipulate the technology required “ex. catalytic converters
on automobile”, which strongly deters the development of other more
- It fails to consider the trade off between costs and benefits or the excess
burden placed on society to pursue non-optimum paths.
- The benefit of this approach is that it does consider much more the
peculiarities of industries and is thus somewhat more flexible than
- Both standards and direct controls often are used together resulting in an
environmental policy that suffers from the problems of both approaches.
Land use control
- Land use control is important part of overall pollution control program.
- Location of the sources of residual pollutants, as control can minimize the
extent of environmental externalities.
- Cities use computer simulation analysis to determine the optimal location of
- One potential Flaw of this approach is that land use Management, controls
zoning and involve very difficult equity problems. They impose pressure on
both individual and firms.
Pollution Taxes or Effluent charges
- This approach is the favorite of many economists, as it attempt to place
“price” for using environment.
- Incentive to use pollution control up to where the marginal cost is equal to the
- Firms would be “treated” differently in the sense of achieving low pollution
- This approach is extremely difficult to implement as it is expensive and
difficult to monitor industry discharges, and requires monitoring system which
is not practical or feasible.
The Information Gap
Initial Empirical Findings
Limitation in Scientific Evidence
- Any legislation of optimal level pollution required enormous amount of
- Conflicting of scientific evidence.
- Limitation of scientific knowledge of the environment and its complexities.
Limitation in Economic Analysis
- Environmental economics is limited by inadequacies of his own discipline as
well as by the insufficient state of the art sciences.
- Environmental and economical tradeoff.
- Economical analysis requires the estimation of both damage and coast of
- Several approaches have been applied to estimate the demand function, but
none have been really successful.
- One prominent technique attempts to measure implicit "revealed preferences"
of individual by examining for example, land or housing prices as related to
- The problem rely on the fact that environmental quality is a public good and
economists have been imperfect to develop a solid analytical techniques for
estimating the demand for a public good in a community with a hetrogenious
Costs of uncertainty
- Given the inadequate data and information currently available, plus the
severely limited analytical tools to correctly approach environmental problems,
policy maker should proceed in solving problems.
- Policy makers often forget that the social costs of inappropriate policies could
very well exceed the social cost of environmental degradation that they are
attempting to eliminate.
- Flexible approach is needed, though still value and hazy.
Private Risks versus Societal Risk
- The social risk involved with uncertainties of environmental decisions is
difficult to handle because such risk cannot be pooled along other public
- The risk may involve irreversible global consequences.
- The private sector also faces a significant amount of uncertainty with regard to
environmental hazards and risks.
- The public sector's responsibility to internalize the problem as a social issue
and thus the public must bear the global consequences of poor decision.
Uncertainty with regard public policy
- Uncertainty can create anxiety between the public and private sectors.
- Giving the current state of knowledge and analytical techniques the public
sector became involve in environmental decisions where the decision making
process itself is uncertain .
- The private sector now is faced with new constrains.
- The costs of private sector activity may become extremely high, due to
enormous transaction cost in involvement in meeting the approval of the
public sector and regulatory requirements.
- Too often the public sector ignore the costs it imposes on the private market
system because of its own inefficient decision making process.
- The risks involved in making mistaken decisions are potentially large, yet the
potential danger of not acting could be more costly.