Question

The total benefit to society from a firm’s pollution abatement is TB = A-0.01A^2. The total cost of abatement to the firm is TC=A. How much would society prefer the firm to abate? If the firm receives no benefits from its pollution abatement, how much will it choose to abate? Discuss how environmental shirking could be alleviated.

Answer 1

The Socially optimal level of pollution abatement occurs at the point where the marginal cost of reducing pollution is equal to the marginal benefit from doing so.

Marginal benefit from Pollution abatement= Marginal Cost of pollution abatement

1-1= 0.02A

A= 0

The Socially optimal Level of Pollution abatement is Zero.

In the above scenario the firm is not receiving any benefits from pollution abatement hence it would not reduce pollution.

How to alleviate Environmental Shirking -

Since the private sector by itself,will not create a market in pollution control so the government must intervene in private-sector markets if the optimal level of control is to be attained.

1) The government can impose Direct pollution controls. But Direct controls are usually costly to enforce and monitor and are inefficient.

2) The government can impose emission taxes and they are an efficient method of pollution abatement.

By imposing an emissions tax which is equal to the marginal external cost of the pollution, the externality (i.e Pollution) will be fully internalized (i.e producer takes into account the effect of pollution while producing the goods) and the efficient amount of pollution abatement (and output) will be produced.

3) the government can provide Tradable Pollution permits which provides the right to emit specified amount of specific pollutants which the firms can trade (buy and sell) among themselves.