Controlling Industrial Pollution: The Economics and Politics of Clean Air

By Robert W. Crandall | Go to book overview

initial level.22 The rights could be traded, much as offsets are traded today, but without the constraints imposed by technology-based new- source standards under the current law.

The initial allocation of zero-priced rights would reflect a political decision, but the setting of the fee would represent regulators' (or Congress's) best judgment as to the appropriate degree of control. The fee and the resulting pollution would give citizens vital information on the cost of further cleanup or the benefits of relaxation. Given the appropriate levels of rights and fees, the collection of pollution taxes would provide much more information on control costs than is currently available.

If the resulting pollution levels were deemed too high, taxes could be raised. If necessary, lump-sum credits could be given to firms penalized by the need to change the tax rate, but credits based on the flow of tax payments would be counterproductive. The most important attribute of a pollution tax system is that it would induce efficient pollution reduction. Since all firms would be faced with the same incremental cost of pollution in each area for each pollutant, each firm would control pollution until its incremental control costs equaled this fee. In this sense pollution taxes are equivalent to marketable rights.23

The further advantage of fees lies in their effect on resource allocation in a world where benefits and costs are imprecisely known. When benefits are unknown but the benefit function is rising at a modestly declining rate, fees are likely to be the best choice of a control instrument (figure 4-1). If the optimal degree of control cannot be specified and if threshold effects of pollution do not exist, setting the wrong pollution tax is measurably better than setting the wrong standard (or the wrong total endowment of transferable rights).

Finally, the two-part pollution tax answers the unstated political objection to fees: that businesses will be forced to incur additional costs of scores of billions of dollars per year without being assured of corresponding reductions in other business taxes.


Summary

The simple economics of controlling an externality such as air pollution argues strongly for the use of fees or taxes rather than quantitative limits whenever the benefits of additional control decline

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22
For a more detailed discussion of this proposal, see chapter 10.
23
It would be necessary to allow trading of the zero-priced rights to assure this efficiency condition. And the pollution fee would have to be binding.

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