Question

. Suppose you have a public good such as pollution abatement, or environmental protection/quality/maintenance, or wildlife/biodiversity/wilderness habitat, etc.

(A)            Define what are the social marginal benefits of abatement (environmental quality) and explain why they would decline with increased abatement. Also define what are the social marginal costs of abatement and explain why they would increase with increased abatement.

(B)            Define the social welfare maximizing level of a pubic good such as pollution abatement, environmental quality, maintenance, etc. What is wrong (why is social welfare reduced) if there is "too little of the public good? What is wrong (why is social welfare reduced) if there is "too much" of the public good?

(C)            Would you conclude that there currently is too much, too little or an efficient amount of maintenance or environmental quality, and explain why you choose that answer?

Answer 1

A) Social marginal benefit of abatement(environmental quality) are cleaner air, more trees planted, less cases of asthma, less hospitalisation cost when pollution is decreased/abated, social marginal benefit is decreased with increase in abatement cost after an optimum level, it is because at the initial stage by consuming one more unit of product the resultant social marginal benefit is larger than its social marginal cost but as consumption is increased the social benefit derived from that consumption starts decreasing since environment is already getting benefited from abatement measures and after an optimum level social marginal benefit is less than its abatement cost/social marginal cost since environment itself is able to absorb the low level of pollution.

Social marginal cost are the taxes/environment compensation cess which every firm has to pay to the government/local government for every unit produced in order to compensate the environment for releasing its externality/pollution but when production is expended then the firms has to pay more and more in terms of taxes/ECC(Environmental Compensation Cess) to the government/local government and its increases the pollution also per each unit produced and due to this the social marginal cost to the consumers/citizens of the area/local area is more than the social marginal benefit they get and this pollute the environment and also increases health issue, i.e. asthma, etc.

B) When marginal social benefit is equal to marginal social cost then it is called social welfare is achieved and maximisation of a public good since at this point MSB=MSC since at this pollution level, environmental quality and maintenance, etc. is maximised and equal to marginal social cost.

Social welfare is reduced when public good is to less/little because suppose number of plants/trees planted are very less/number of parks made are very less and due to that cleaner air is not that at sufficient level since number of consumer/citizens are in large number than the available public good and not all citizens/consumers are able to access the limited public good, i.e. street light, numbers of trees and city park maintained by government.

Social welfare is also reduced when there is too much of public good since to produce public good its production is also to be increased and with its production it increase the pollution level, health issues, i.e. asthma and its hospitalisation which are social marginal cost and finally it decreases the social welfare gained from it and due to that very reason social welfare decreases due to increase in public good.

C) It is an efficient amount of maintenance/environmental quality since if marginal social cost is higher than marginal social benefit then the government/local government of that area will increase the taxes/environment compensation cess and will use that amount to increase the public good in order to increase the marginal social benefit and will also restrict the production of extra production of the given unit in order to restrict the pollution level to a optimum level where marginal social benefit is equal to marginal social cost(MSB=MSC) since due to political pressure, international pressure and UNFCCC(United Nations Framework Convention on Climate Change) commitments and due to demand by its citizens/voters, government will try to make a balance between its economic growth and optimum level marginal social benefit to them.