An anatomy of a groundwater contamination episode

Using the contamination episode at Price Landfill, New Jersey, as a case study, major analytical and informational issues characterizing groundwater pollution, with special emphasis on uncertainty associated with the environmental medium, especially solute-transport processes, and the valuation of health risks, principally dose-response relationships, are addressed. Alternative approaches to modeling the physical-chemical processes are described and subsequently coupled with mortality risk predictions to derive estimates of expected pollution costs: reduced longevity (pollution damage costs) and cost of control and remedial measures (damage reduction costs).     

Losses from effluent taxes and quotas under uncertainty

Recent theoretical papers by Adar and Griffin (J. Environ. Econ. Manag.3, 178–188 (1976)), Fishelson (J. Environ. Econ. Manag.3, 189–197 (1976)), and Weitzman (Rev. Econ. Studies41, 477–491 (1974)) show that,different expected social losses arise from using effluent taxes and quotas as alternative control instruments when marginal control costs are uncertain. Key assumptions in these analyses are linear marginal cost and benefit functions and an additive error for the marginal cost function (to reflect uncertainty). In this paper, empirically derived nonlinear functions and more realistic multiplicative error terms are used to estimate expected control and damage costs and to identify (empirically) the mix of control instruments that minimizes expected losses.     

Pollution taxes and standards: A continuum of quasi-optimal solutions

A generalized second-best problem, involving a perfectly competitive industry which produces a pollution type of externality, is examined. The pollution tax is allowed to assume an arbitrary value (possibly zero), while a pollution standard, set as a ratio of pollution to output, is determined by a first-order optimizing condition. The general condition for a set of quasi-optimal solutions includes the Pareto-optimal solution as a special case. It is also found that when the pollution tax is below the optimal level, the usual implication is that the standard should be set so that the marginal cost of pollution reduction exceeds the marginal external damage.     

Firm behavior under imperfectly enforceable pollution standards and taxes

Assuming expected profit maximization, the behavior of the firm under imperfectly enforceable pollution standards is examined. Among other results, it is found that cost subsidies can reduce the size of violation and amount of wastes, and that the shape of the expected penalty function determines the direction of the firm response to tighter standards. Under imperfectly enforceable pollution taxes, it is found, among other results, that the firm's actual level of wastes is independent of proportional changes in the expected penalty for pollution tax evasion, and that the marginal cost of actual waste reduction equals the unit tax on reported wastes. Some normative aspects of the results are discussed.     

Emission control policies under uncertainty

The paper deals with the problem of optimal environmental policy under uncertainty. Usually, when an environmental policy is considered, only the expected values of the parameters of the marginal benefit and marginal cost functions associated with the policy are known. Thus a relevant question is: In the presence of uncertainty, what is the optimal policy mean for achieving the environmental objective? The study addresses itself to the specific objective of improving air quality although the analysis is generally applicable. The policy means are emission taxes and emission quotas. It is shown that under uncertainty neither of these means is generally optimal, and that specific parameter values of the costs and benefits relations and their distributions determine the optimal policy for each situation.     

Externalities and the urban rent and population density functions: The case of air pollution

In this paper, we introduce external diseconomies into the standard model of urban land rent via the case of air pollution, exploring the implications of law making on the urban structure. Three alternative legal arrangements of air pollution damage costs are analyzed: first, the recipient bears the cost; second, the producer bears the cost; and third, the compulsory use of emission control systems in the car.     

An economic analysis of air pollution from coal-fired power plants

The benefits of air pollution control techniques on a coal-fired power plant are Simulated with a scientifically based environmental model. Air pollution abatement techniques are assessed in terms of their resource cost (measured in dollars) and their effectiveness in reducing environmental damage (measured in dollars and healthy days lost). Which air pollution techniques are most efficient depend upon how much a day of health should be valued. Other factors of potential interest such as uncertainty and equity are also simulated through the model. The paper demonstrates that scientific evidence can be organized around economic principles in order to develop more rational and effective environmental policies.     

Modeling the impact of uncertainty in emissions trading markets with bankable permits

The various forms of uncertainty that firms may face in bankable emission permit trading markets will affect firms’ decision making as well as their market performance. This research explores the effect of increased uncertainty over future input costs and output prices on the temporal distribution of emission. In a dynamic programming setting, the permit price is a convex function of stochastic prices of coal and electricity. Increased uncertainty about future market conditions increases the expected permit price and causes a risk neutral firm to reduce ex ante emissions in order to smooth out marginal abatement costs over time. Finally, safety valves, both low-side and high-side, are suggested to reduce the impact of uncertainty in bankable emission trading markets.     

The regulation of a spatially heterogeneous externality: Tradable groundwater permits to protect streams

Groundwater pumping can reduce the flow of surface water in nearby streams. In the United States, recent awareness of this externality has led to intra- and inter-state conflict and rapidly-changing water management policies and institutions. Although the marginal damage of groundwater use on stream flows depends crucially on the location of pumping relative to streams, current regulations are generally uniform over space. We use a population data set of irrigation wells in the Nebraska portion of the Republican River Basin to analyze whether adopting spatially differentiated groundwater pumping regulations leads to significant reductions in farmer abatement costs and costs from damage to streams. We find that regulators can generate most of the potential savings in total social costs without accounting for spatial heterogeneity. However, if regulators need to increase the protection of streams significantly from current levels, spatially differentiated policies will yield sizable cost savings.     

A note on optimal taxation of environmental spillovers

This note addresses the question of what policy the government should adopt when industrial pollution can be reduced partially by the imposition of effluent taxes and partially by a publicly operated waste treatment plant.In the case of increasing returns to public abatement, an effluent tax set at marginal user cost will not generate enough revenue to finance the facility. The key issue is that of finding additional revenue the most efficiently. Here, this question is dealt with in the framework of commodity taxation, with consideration given to the possibility that both effluent and commodity taxes derived on efficiency grounds might be quite regressive.     

Intertemporal environmental management with a storable pollutant

A model is developed which allows decisions on generation and emission of an environmental pollutant to be separated in time. After deducing and discussing the necessary conditions for the socially optimal time pattern of generation and emission the possibility of using pollution taxation to motivate this optimal solution is investigated. The principle finding is that there exists no time pattern of fixed per-unit pollution taxes that will result in optimality. In particular, this demonstrates the failure of that pattern of fixed per-unit taxes which reflects the optimal marginal social cost of emission at each point in time.     

Spatial economic theory of pollution control

In February 1972 the Nixon Administration proposed a tax on sulfur oxide emissions, beyond the Federal standards, of electric power plants. It was hoped that such a tax would discourage power plant locations in heavily polluted areas like urban areas. Assuming that such a tax varies over space because pollution is not invariant over space, the spatial theory of the firm is presented in this paper cast doubt on the efficacy of such a polltuion tax to achieve the desired goal of the administration. In particular it is shown that the cost-minimizing spatial firm would abate its pollution in response to a tax by either changing its location or by reducing waste through process change or by using a transportable abatement good if the tax savings due to the change in marginal abatement through location change per unit change in abatement is greater than or equal to transport rate on the abatement good. If the goal of the firm is to maximize profits, the desired outcome would follow if in addition to the fulfillment of the above condition the percentage change in the delivered price of raw material (situated at one end of the linear location space) per unit distance is greater than or equal to the percentage change in net marginal revenue, i.e., marginal revenue net of transport cost per unit of output. In simple terms, the conclusions of this paper raise doubts regarding the effectiveness of a pollution tax in curtailing pollution of a firm which is operating in a space economy. This outcome is peculiar to a spatial firm. Sufficient conditions also have been obtained when land input is included in the production function of the firm.     

Municipal wastewater treatment cost

The cost of control for conventional pollutants at municipal wastewater treatment plants is examined. Empirical estimates of the effect of performance measures as well as the flow size of the waste stream are obtained for both the capital and the operation and maintenance components of total facility cost. These estimates are used to calculate the marginal cost per pound of pollution control over the range of effluent concentration beyond secondary treatment. The implications of the results for current environmental policy issues are outlined.     

Uniformity versus differentiation in regulating externalities

In the regulation of pollutant emissions, a regulator may treat different sources (with different costs and environmental damage) as though they were the same—for institutional, informational, or transaction cost reasons. This may occur despite the efficiency gains from regulatory differentiation of sources. This issue has been a source of much controversy in the environmental economics literature and is examined here from a theoretical perspective. Using a two pollutant economy, emissions and net social benefits are compared for the case of efficient, differentiated regulation and the case of uniform, undifferentiated regulation of the aggregate of the two pollutants. We show when aggregate emissions will be greater than, equal to, or less than efficient emissions and we derive conditions for each of these three possibilities. Further, we show that when marginal costs and benefits become more steeply sloped, the inefficiency associated with undifferentiated regulation increases.     

Incorporating Uncertainty of Management Costs in Sensitivity Analyses of Matrix Population Models

The importance of accounting for economic costs when making environmental‐management decisions subject to resource constraints has been increasingly recognized in recent years. In contrast, uncertainty associated with such costs has often been ignored. We developed a method, on the basis of economic theory, that accounts for the uncertainty in population‐management decisions. We considered the case where, rather than taking fixed values, model parameters are random variables that represent the situation when parameters are not precisely known. Hence, the outcome is not precisely known either. Instead of maximizing the expected outcome, we maximized the probability of obtaining an outcome above a threshold of acceptability. We derived explicit analytical expressions for the optimal allocation and its associated probability, as a function of the threshold of acceptability, where the model parameters were distributed according to normal and uniform distributions. To illustrate our approach we revisited a previous study that incorporated cost‐efficiency analyses in management decisions that were based on perturbation analyses of matrix population models. Incorporating derivations from this study into our framework, we extended the model to address potential uncertainties. We then applied these results to 2 case studies: management of a Koala (Phascolarctos cinereus) population and conservation of an olive ridley sea turtle (Lepidochelys olivacea) population. For low aspirations, that is, when the threshold of acceptability is relatively low, the optimal strategy was obtained by diversifying the allocation of funds. Conversely, for high aspirations, the budget was directed toward management actions with the highest potential effect on the population. The exact optimal allocation was sensitive to the choice of uncertainty model. Our results highlight the importance of accounting for uncertainty when making decisions and suggest that more effort should be placed on understanding the distributional characteristics of such uncertainty. Our approach provides a tool to improve decision making.     

Environmentally Sensitive Productivity Analysis of the Canadian Pulp and Paper Industry, 1959-1994: An Input Distance Function Approach

This study employs a parametric input distance function that incorporates both desirable and undesirable outputs to provide a more complete representation of the production technology from which environmentally sensitive productivity and efficiency measures can be generated. This framework also generates pollution abatement cost estimates that are useful for policy making. An input-based Malmquist index of productivity growth that appropriately credits the producer not only for increases in marketable or desirable outputs but also for the production of improved environmental quality through pollution abatement activities is derived from the input distance function. The method was applied to time series data from the Canadian pulp and paper industry. Our shadow price estimates indicate that the marginal cost to producers of pollution control has been rising. The main conclusion of this study is that productivity improvement, from the social viewpoint, has been stronger than conventional measures would suggest.     

Cost‐effective conservation of an endangered frog under uncertainty

How should managers choose among conservation options when resources are scarce and there is uncertainty regarding the effectiveness of actions? Well‐developed tools exist for prioritizing areas for one‐time and binary actions (e.g., protect vs. not protect), but methods for prioritizing incremental or ongoing actions (such as habitat creation and maintenance) remain uncommon. We devised an approach that combines metapopulation viability and cost‐effectiveness analyses to select among alternative conservation actions while accounting for uncertainty. In our study, cost‐effectiveness is the ratio between the benefit of an action and its economic cost, where benefit is the change in metapopulation viability. We applied the approach to the case of the endangered growling grass frog (Litoria raniformis), which is threatened by urban development. We extended a Bayesian model to predict metapopulation viability under 9 urbanization and management scenarios and incorporated the full probability distribution of possible outcomes for each scenario into the cost‐effectiveness analysis. This allowed us to discern between cost‐effective alternatives that were robust to uncertainty and those with a relatively high risk of failure. We found a relatively high risk of extinction following urbanization if the only action was reservation of core habitat; habitat creation actions performed better than enhancement actions; and cost‐effectiveness ranking changed depending on the consideration of uncertainty. Our results suggest that creation and maintenance of wetlands dedicated to L. raniformis is the only cost‐effective action likely to result in a sufficiently low risk of extinction. To our knowledge we are the first study to use Bayesian metapopulation viability analysis to explicitly incorporate parametric and demographic uncertainty into a cost‐effective evaluation of conservation actions. The approach offers guidance to decision makers aiming to achieve cost‐effective conservation under uncertainty.     

Implementing optimal taxes using tradable share permits

This paper presents a simple system for efficient regulation under asymmetric information. Each firm's income is controlled by a tax that depends on the firm's own output and on a parameter construed as a share permit. These “shares of total expected output” lower a firm's tax burden and are acquired in a competitive market. By employing this scheme, the planner only requires knowledge of marginal damage to induce the first-best outcome. Relative to a traditional cap-and-trade approach the system increases expected social welfare.     

Monopoly and external costs: An application of second-best theory to the automobile industry

A monopoly that creates external costs poses a classic second-best problem: Whereas optimal allocation would be achieved by both removal of the monopoly and correction of the externality, it cannot be presumed that either action taken alone would improve welfare. It is shown that the desirability of pursuing either policy in isolation depends on the relative size of the external cost and the monopolist's price-cost margin. The analysis is applied to the automoblie manufacturing industry. Under current estimates of pollution damage and price-cost margin, industry output is suboptimal. Whereas this finding may not be translated directly into policy recommendations, it suggests that some skepticism about internalizing pollution costs is justified unless such action is accompanied by an appropriate reduction in monopoly power.