Question

Explain why reducing pollution levels to zero is unlikely to be economically efficient. Use a graph showing a marginal benefit curve and a marginal cost curve to support your explanation. On the graph you must show the shift in curve, equilibrium, and deadweight loss.

Answer 1

If there is an optimal level of cleanliness, then there is also an optimal level of pollution. If the marginal cost of pollution abatement is just equal to the marginal benefit from pollution abatement, then we have reached the point where society's welfare has been maximized with respect to environmental quality. If the marginal benefit of reducing pollution were greater than the marginal cost of reducing pollution, then society would benefit from a reduction in pollution. The benefit would be equal to the amount by which the marginal benefit of the cleanup exceeded the marginal cost of the cleanup. Just as it is possible to have too dirty an environment, it is also possible to have too clean an environment. If the marginal cost of pollution abatement exceeds the marginal benefit from the reduction, then the benefit of cleaning the environment is not worth the expense. Consequently, further attempts to clean up the environment will result in a reduction in welfare.

Economists have argued that it is not efficient to reduce pollution to zero. The cost of this reduction would probably exceed the benefits. Waterways and the atmosphere have a natural capacity to assimilate at least some pollution with no associated ill-effects on the environment or humans. To not benefit from this natural assimilative capacity would be wasteful.

The following diagram contains hypothetical curves for the marginal benefits of controlling air pollution and marginal costs of controlling air pollution.

Thus, as observed in the graph above, the optimal level of pollution is not zero; instead, the optimal level is obtained by following our economic decision rule of equating the marginal benefit to the marginal cost.

Initially, the equilibrium with no internalization of the external cost due to air pollution is given by the Market Quantity level of output with the equilibrium price being given by Marginal Benefit = Marginal Private Cost curve

But, with an accounting of external cost, the new equilibrium is given by the Social Quantity level of output with the equilibrium price being given by Marginal Benefit = Marginal Social Cost curve

Further, it shall be noted that the Social Quantity does not imply the pollution is zero.