0 12 polluter pays principle

Polluters have to pay for the environmental damages that they create. Different methods to internalise the external costs of pollution are discussed here.

1. POLLUTER PAYS PRINCIPLE
Prof Prabha Panth,
Osmania University

2. Environmental Goods are Public Goods:-
1. Ownership:
Economic goods have ownership, the owner has the right
to sell it in the market.
But Environmental goods, such as oxygen, or an ocean,
are not owned by anybody, so cannot be bought and sold
in the market.
2. Excludable:
Economic goods: It is possible to exclude others from
using the good you own. E.g. your TV, others cannot use
the same TV. Others are excluded from consuming the
goods that you have purchased.
Using environmental goods –others can’t be excluded. For
e.g. if you breathe oxygen from the air, you can’t prevent
others from doing so.
CHARACTERISTICS OF ENVIRONMENTAL GOODS

3. 3. Rival Goods:
If one person uses an economic good, then the same good is
not available in the shop/ market for others. E.g. if you buy a
TV and take it away, then the number of TVs in the shop will
be reduced by one.
Environmental goods are also rival. If a factory pollutes a lake,
it affects fishermen fishing in the lake.
4. Externality:
The person using the economic good gets the benefits and
pays the cost. E.g. you pay for a TV set, and you enjoy the
programmes on it.
Environmental goods: the costs/benefits are not borne by
those who use it. E.g. your car emits air pollution, but you
don’t pay for the air that you are using up. But people on the
road have to pay for treatment of asthma, and other lung
diseases that your pollution has caused.
NATURE OF ENVIRONMENTAL GOODS

4. •Since environmental goods cause external
disbenefits, the question is who should pay?
Or bear the cost of environmental
degradation?
•It is unfair to make victims of environmental
disasters pay for the cost of controlling and
cleaning the environment.
•The Polluter should Pay for the damage he is
causing to the environment.
WHO PAYS THE COSTS

5. •Polluters or environmental violators will not
willingly pay for the clean up of the environment,
even though they are guilty of spoiling it.
•Therefore the Government undertakes to force
polluters to pay for their environmental damages.
Through:
1) Direct Command and Control methods, and
2) Market controls, i.e. internalising the external
costs of pollution, and making the polluter pay
for it.
POLLUTER PAYS PRINCIPLE (PPP)

6. •Since pollution costs are external costs, the
government tries to internalise these costs to the
polluter.
•Called Command and Control or C and C.
•When environmental costs becomes part of the
polluter’s money costs, he has to either pay them, or to
avoid these payments , reduce his pollution.
•The Government can follow two methods:
1) Non-market controls: such as fines, fees, penalties,
legal action, closure of polluting factories, and
imprisonment for breaking environmental laws.
DIRECT METHODS –C AND C

7. 2) Market controls: consists of (i) pollution taxes,
and (ii) marketable pollution permits.
(i)Pollution Taxes: suggested by Pigou (1932) to
internalise external costs.
Based on the social marginal costs it imposes on
society.
a)Pigoviantaxes: A lump sum tax is imposed on
the output produced, since pollution rises with
rising output.
Assuming that the firm is in perfect
competition, AR = MR, and MC is a rising curve.
MARKET CONTROLS

8. The Pigoviantax is a corrective
instrument to realise the socially
optimal level of economic
activity generating pollution.
•In Fig.1 the firm is in perfect
competition, producing output
Q1, at A where its MR=MC. MC is
its private cost
•The Social Marginal Cost (SMC) is
equal to private cost plus
marginal environmental cost,
where MEC = AB
•So SMC = MC + MEC
•Now the optimum level of output
for the firm is at C, where MR =
SMC.
•.
A. PIGOVIAN TAXES
Output
Rs.
0
P
AR=MR
MC
SMC = MEC + MC
Q2 Q1
C
D
B
A
Figure 1. Pigovian
Tax

9. •Now the optimum level of
output for the firm is at C,
where MR = SMC.
•The cost of pollution AB = CD,
and if this can be internalised
to the firm’s costs, then the
firm will be at the new
equilibrium C.
•According to Pigou, AB = CD
should be the pollution tax
levied by the government, to
force the firm to reduce its
output to Q2, and thus reduce
its pollution.
A. PIGOVIAN TAXES
Output
Rs.
0
P
AR=MR
MC
SMC = MEC + MC
Q2 Q1
C
D
B
A
Figure 1

10. •Limitations:
How to identify pollution and get its monetary cost? Is it
only cost of clean up?
Social marginal cost or impact of pollution on society and
ecology is too enormous, spread over time and space, and
cannot be measured and monetised.
Reducing output is not the answer, as the pollutant may
be toxic even in small quantities.
Oligopoly and monopoly exist, not perfect competition, so
sellers can pass on the burden of extra cost MEC to the
consumers.
Also they make huge profits, so they may pay the tax, and
continue to pollute.
A. PIGOVIAN TAXES

11. •Taxes to control pollution may not work, as many
firms will find the costs too high, and may be
driven out of the market.
•Another method to internalise pollution costs is
by Marketable Pollution Permits.
•It is a combination of Command and Control and
market based instruments to control pollution.
•It penalises high polluters, but rewards those who
control their pollution.
B. MARKETABLE POLLUTION PERMITS:

12. •Some firms may incur high costs to reduce
pollution.
•Others may either produce with lower
pollution levels, or with lower costs of
pollution control.
•The Government sets an acceptable level of
pollution per firm, e.g. BOD 250 mg/litre.
•All firms have to reduce their water pollution
to this level, or face penalties.
B. MARKETABLE POLLUTION PERMITS:

13. •Assume that Firm X is emitting more pollution than the
government standard (i.e. > 250 mg).
•Another Firm Y is emitting pollution less than this level.
•Then Firm X can “buy” this level of pollution from Y,
and show it as its own reduction!
•Firm Y gets paid for its lower pollution,
•And Firm X redistributes its pollution to X, without
having to reduce either its output, or incurring greater
costs of controlling its pollution.
•Then aggregate pollution from both firms will be equal
to the Government permitted level of pollution.
B. MARKETABLE POLLUTION PERMITS:

14. B. MARKETABLE POLLUTION PERMITS:
0
50
100
150
200
250
300
350
400
BOD
mg/l
Mg/litre
Figure 2 Pollution Permits
Firm XFirm Y
•In Fig.2 Firm Y emits only 150
mg/l of BOD which is 100 mg less
than Government’s minimum of
250 mg/l.
•Firm X emits 350 mg/l, which is
100 mg higher than the limit.
•Now X pays Y for the difference
of 100 mg, i.e. it transfers its own
extra mg to Y for a payment. It
buys the lower pollution levels of
Y.
•Now both would have reached
the government’s limit of 250
mg/l of BOD!

15. •Firm Y will sell its extra permit because it can
earn income on its compliance.
•Firm X will buy the permit, because it will be
saving on higher pollution control costs.
•This may be beneficial to both in the short run.
•But how long will X pay Y?
•In the long run it is better for it to install pollution
control mechanisms to reduce its pollution.
B. MARKETABLE POLLUTION PERMITS:

16. •Limitation:
What is the price that X pays to Y? Is it a fair
amount?
Although Government puts a limit on pollutants,
it does not mean that both firms should not
pollute less than this level.
Distributional problems arise if both firms are not
equal in status.
At the global level, the Kyoto Summit on Climate
Change allows international permits in CO2
emissions.
B. MARKETABLE POLLUTION PERMITS:

17. Less developed countries are given “credits” for
their lower pollution, which they can trade with
the more polluting nations in the West.
For instance, Europe and USA buy permits from
less developed countries, and continue to pollute.
But price of carbon credits per ton is only about
USD 15 to USD 40.
Cost of reducing CO
2 per ton is naturally much
higher. So rich countries prefer to pay the carbon
credits, and save on their pollution control costs.
Pollution still continues –global warming results.
B. MARKETABLE POLLUTION PERMITS: