Essay！！

Standards

Richard Martin

University of Victoria

March 20, 2019

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Review

Last class we looked at decentralized solutions to environmental problems: government involvement was basically limited to establishing and enforcing property rights.

The affected parties then either negotiated a solution to the problem, or made use of the legal system (liability for damages).

Today we look at the opposite end of the spectrum, where the government is heavily involved in mandating behaviour.

Pollution standards have historically been the most popular form of environmental regulation.

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Standards:

Standards:

Simple approach to behaviour modification: If the government wants people to behave a certain way, make it illegal (and punish) to do otherwise. Should be familiar concept to you if you drive a car. Environmental example: Firms are only allowed to emit X tons of pollutant per year: if firm exceeds X tons in the year, CEO goes to jail. What does this imply about the price per unit of emissions?

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Standards:

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emissions

Figure 1: Price per unit of emissions with performance standard:

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Performance standard, single source.

Suppose there was a single source of emissions, and the government knew both the marginal abatement cost and the marginal damages.

MAC = MD = e?? = Optimal performance standard: you are allowed to produce e?? units of pollution for free, but if you exceed e??, jail time.

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Performance standard, single source.

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emissions

Figure 2: Performance standard with single source.

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Performance standard, single source.

Advantages of performance standards:

Simple and direct. Can trigger immediate reduction in emissions. Consistent with most people’s belief that externalities are uni-directional (not like what we saw in the case of the encroached airport last class). Consistent with other ways the government tries to modify our behaviour: e.g. speed limits.

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Performance standard, single source.

Types of standards: 1 Ambient standard: “never” exceed level of ambient pollution. 2 Emission standard: “never” exceed emissions: several varieties.

rate: mass/time concentration: mass/volume mass mass/output mass/input mass released/total mass.

3 Technological standard: pollution source must use specific technology to reduce emissions.

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Economics of Standards

Economics of performance standards:

Choose the standard es such that MAC = MD. How are allowed emissions partitioned across multiple sources? Standards are all or nothing:

if the standard is met no reason to do any better. the standard should always be met, regardless of circumstance.

Uniformity of standards: different circumstances (windy vs. still) have different socially optimal levels of emissions: a uniform (constant) standard can not be uniformly optimal.

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Economics of Standards

$

emissions

Figure 3: Uniform standard fails to maximize surplus when marginal damages differ.

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Economics of Standards Equi-marginal principle

Uniform standards are not in general a cost effective way to reduce emissions.

If firms differ by marginal abatement costs then imposing a uniform standard will not equate Marginal abatement costs: the same reduction in emissions could be achieved at a lower cost to society. MAC1 = MAC2 = MD = e?? = uniform standard= e

??

2

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Economics of Standards Equi-marginal principle

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emissions

Figure 4: Failure of equi-marginal principle with multiple sources.

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Incentive Effects

Incentive Effects: We have seen that standards imply that firms can pollute the environment for free up to the standard.

1 This implies that firms face no incentives to reduce emissions further once they have met the standard... even if they can do so at minimal cost.

2 Likewise firms will incur huge expenses to ensure that the standard is not exceeded, even when the marginal damage of exceeding the standard is far lower.

Standards are all or nothing. Standards also create weak incentives for innovation that can shift down a firm’s MAC curve over time.

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Incentive Effects

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emissions

Figure 5: Incentive to innovate with unresponsive performance standard.

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Incentive Effects

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emissions

Figure 6: Incentive to innovate with responsive performance standard.

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Incentive Effects

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emissions

Figure 7: Technology forcing standard.

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Incentive Effects

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emissions

Figure 8: Incentive to innovate when property right granted to recipient and bargaining.

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Incentive Effects

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emissions

Figure 9: Incentive to innovate when property right granted to source and bargaining.

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Enforcement

Enforcement:

Any policy designed to affect behaviour will have costs associated with monitoring and sanctioning behaviour. The larger the change in desired behaviour the greater the enforcement cost. The discrete nature of standards adds an additional challenge. If the punishment associated with non-compliance is too low firms might (optimally) choose not to comply. If the punishment associated with not meeting the standard too harsh

firms will put most of their effort into fighting the standard via costly lobbying and/or threaten to leave the country. government might be tempted to let the firm off the hook to avoid loss of jobs... in an election year.

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