EIF2002

ENVIRONMENTAL
ECONOMICS

Topic 4
Conventional Solutions to
Environmental Problems:
Command-and-Control Approach

DR.SANTHA CHENAYAH

santha@um.edu.my

1
Command-and-
Control (CAC)

❑A Command-and-Control (CAC) approach to

public policy is one where, in order to bring
about behavior thought to be socially desirable,
political authorities simply mandate the
behavior in law, then use whatever enforcement
machinery— courts, police, fines, and so on—
that is necessary to get people to obey the law
Command-and-Control
(CAC)

In the case of environmental policy, the

command-and-control approach consists of
relying on standards of various types to bring
about improvements in environmental quality

In general, a standard is simply a mandated

level of performance that is enforced in law
Command-and-
Control (CAC)

❑ For example, a maximum level of a toxic, such as ppm

(parts per million) of arsenic in drinking water
❑ A speed limit is a classic type of standard; it sets
maximum rates that drivers may legally travel
❑ An emission standard is a maximum rate of emissions
that is legally allowed
❑ The spirit of a standard is, if you want people not to do
something, simply pass a law that makes it illegal, then
send out the authorities to enforce the law
Standards in
Environmental Policy

– Types of Environmental Standards

– Ambient standard – a standard that designates the
quality of the environment to be achieved, typically
expressed as a maximum allowable pollutant
concentration
– Technology-based standard – a standard that
designates the equipment or method to be used to
achieve some abatement level
– Performance-based standard – a standard that
specifies a pollution limit to be achieved but does not
stipulate the technology
Ambient Standards

▪ Ambient environmental quality refers to the

qualitative dimensions of the surrounding
environment; it could be the ambient quality of the
air over a particular city or the ambient quality of
the water in a particular river
▪ So an ambient standard is a never-exceed level for
some pollutant in the ambient environment
▪ For example, an ambient standard for dissolved
oxygen in a particular river may be set at 3 parts per
million (ppm), meaning that this is the lowest level
of dissolved oxygen that is to be allowed in the river
Ambient Standards

▪ Ambient standards cannot be enforced directly, of

course
▪ What can be enforced are the various emissions that
lead to ambient quality levels
▪ To ensure that dissolved oxygen never falls below 3
ppm in the river, we must know how the emissions of
the various sources on the river contribute to changes
in this measure, then introduce some means of
controlling these sources
▪ Ambient standards are normally expressed in terms of
average concentration levels over some period of time
 Ambient Standards

▪ For example, the current national primary ambient air quality standard for
carbon monoxide (CO) is 9 ppm based on an 8-hour averaging time and 35
ppm based on a 1-hour averaging time

▪ Neither can be exceeded more than once per year

▪ The reason for taking averages is to recognize that there are seasonal and
daily variations in meteorological conditions, as well as in the emissions
that produce variations in ambient quality

▪ Averaging means that short-term ambient quality levels may be worse

than the standard, so long as this does not persist for too long and it is
balanced by periods when the air quality is better than the standard
Technology Standard

▪ There are numerous standards that don’t actually specify

some end result, but rather the technologies, techniques, or
practices that potential polluters must adopt
▪ The requirement that cars be equipped with catalytic
converters or seat belts is a technology standard
▪ If all electric utilities were required to install stack gas
scrubbers to reduce SO2 emissions, these would be, in effect,
technology standards because a particular type of technology
is being specified by central authorities
▪ This type of standard also includes what are often called
design standards or engineering standards
Technology Standard

▪ There are also a variety of product standards specifying characteristics that

goods must have and input standards that require potential polluters to
use inputs meeting specific conditions

▪ At the edges, the difference between a performance standard and a

technology standard may become blurred

▪ The basic point of differentiation is that a performance standard, such as

an emission standard, sets a constraint on some performance criterion and
then allows people to choose the best means of achieving it

▪ A technology standard actually dictates certain decisions and techniques

to be used, such as particular equipment or operating practices to be used
by polluters.
Technology Standard

▪ The carbon monoxide, hydrocarbon, and noise

limits are emission standards; the limit on
snowmobiles entering Yellowstone National Park
can be thought of as a technology standard, as it
restricts the use of certain machines in this setting
Emission Standards

– Emission standards are never-exceed levels applied directly to

the quantities of emissions coming from pollution sources
– Emission (or effluent) standards are normally expressed in
terms of quantity of material per some unit of time—for
example, grams per minute or tons per week
– Continuous emissions streams may be subject to standards
on “instantaneous” rates of flow: for example, upper limits on
the quantity of residuals flow per minute or on the average
residuals flow over some time period
– These are sometimes called “performance standards”
Emission Standards

– In the language of regulation, emission standards are a type

of performance standard because they refer to end results
that are meant to be achieved by the polluters that are
regulated

– There are many other types of performance standards: for

example, workplace standards set in terms of maximum
numbers of accidents or levels of risk to which workers are
exposed

– A requirement that farmers reduce their use of a particular

pesticide below some level is also a performance standard, as
is a highway speed limit
Uniformity of Standards

– A very practical problem in standard setting is whether it should

be applied
uniformly to all situations or varied according to circumstances
– This can be illustrated by using the problem of the spatial
uniformity of standards
– The ambient air quality standards in the United States, for
example, are essentially national
– The problem with this is that regions may differ greatly in terms
of the factors affecting damage and abatement cost relationships,
so that one set of standards, uniformly applied across these local
variations, may have serious efficiency implications
Implications of Using
Standards

– Two key implications

– Are standards set to achieve allocative efficiency?

– where MSB of abatement equals MSC of

abatement

– Given some environmental objective, is that

objective being achieved in a manner that is cost-
effective?
Efficient Standards

MSBAbatement = MSCAbatement
 MSB of Abatement

– Additional social gains as pollution abatement

increases
– Measured as reduction in damages or costs caused
by pollution (i.e., reduction in MEC)
– Represents society’s D for environmental quality
– Implies MSB is negatively sloped
 MSC of Abatement

– Sum of all polluters marginal abatement costs plus government’s

marginal cost of enforcement

– Two components: MSC = MACMKT + MCE

• MACMKT is the sum of all polluters’ individual marginal abatement cost (MAC) functions

– MACi = MACMKT

• MCE is marginal cost of enforcement

– Change in government’s cost of monitoring and enforcing abatement

– MSC is positively sloped

Firm-Level MAC

– Measures the change in cost from reducing

pollution, using least-cost method
– Equals forgone M if the least-cost abatement
method is to reduce output

– Typically positively sloped and increasing at

increasing rate
– For simplicity, it is usually assumed that MAC is
linear
 Firm’s MAC (typical shape)

MAC
$

Abatement (A)
 MSC of Abatement
$ MSC = MACMKT + MCE

MACMKT
MCE

A1 Abatement (A)
Allocatively Efficient
Level of A (AE)

– AE occurs at the point where:

– MSB of abatement = MSC of abatement
– Graphically where the two curves intersect
 Modeling AE

$ MSC

MSB

AE Abatement (A)
 Why Standards May Not Be
Efficient

– Legislative Constraints
– Many standards are benefit-based, i.e., set to improve society’s
well-being with no consideration for the associated cost

– Imperfect information
– Inability to identify MSB and/or MSC
– MSB: due to the problem of nonrevelation of preferences

– MSC: difficulty in identifying each firm’s MAC, including implicit costs

Why Standards May Not Be
Efficient
(continued)

– Nonuniformity of pollutants

– Changes in emissions do not have uniform effects on

environment

– e.g., if polluters are at different distances from populations

or ecosystems, MSB would vary

– Regional differences

– Even if AE is identified at the national level, it is not

likely to be efficient at regional level
 Modeling Regional Differences

– Consider two regions, X and Y, with same MSC of

abatement
– Suppose their MSB of abatement curves differ, such that
MSBX < MSBY
– Result: Allocatively efficient level of abatement for region
X (AX) would be lower than for region Y (AY)
 Regional Differences

$ MSCX = MSCY

MSBY = MSCY

MSBY
MSBX = MSCX

A single national abatement MSBX

standard would not be optimal
for both regions

AX AY A
 Next Step

– If allocatively efficient standards are unlikely, we use

cost-effectiveness to evaluate how standards are
implemented

– Cost-effectiveness depends on the approach

– Command-and-control: using standards or rules to control pollution

– Market: using incentives and market forces to motivate or encourage

abatement and conservation
Command-and-
Control (CAC)

Assessing Cost-Effectiveness
Two Standards to Examine

– Technology-based standard
– Uniform standard
CAC and
Technology-
based
Standards
Technology-Based
Standards

– Technology-based standards specify the

type of abatement equipment or method
to be used
– By definition, these standards potentially
prevent firms from selecting and using the
least-cost abatement method
Analysis: Use MAC
Curve

– Technology-based standard
– If prevented from using the least-cost
abatement method, firms would operate
above their MAC curve
– Performance-based standard
– If allowed to select an abatement method to
achieve some performance level, -
maximizing firms will choose the least-cost
method and operate on the MAC curve
 Modeling Cost-Ineffectiveness

$ MAC
Technology-based
standard

MAC represents least-cost

method of abatement
Performance-based Technology-based standards
standard can force some firms to operate
above MAC

AX Abatement (A)
CAC and
Uniform
Standards
 Overview

– Uniform standards waste economic resources as long as

abatement costs differ among polluting sources

– Cost savings can be obtained if low-cost abaters do more

cleaning up than high-cost abaters

– Let’s prove this by building a model of 2 hypothetical firms

 Model

– Assumptions
– 2 polluting sources in some region
– Each generates 10 units of pollution
– Government sets emissions limit of 10 units for region, or 5 units per firm
– Uniform standard: each firm must abate 5 units
– Cost conditions
Polluter 1: TAC1 = 1.25(A1)2
MAC1 = 2.5(A1)
– where A1 is pollution abated by Polluter 1

Polluter 2: TAC2 = 0.3125(A2)2

MAC2 = 0.625(A2)
– where A2 pollution abated by Polluter 2
 Model

– Find the total abatement costs using the uniform standard

– Solution:

– The TACs for each firm are

– TAC1 = 1.25(A1)2 = 1.25(5)2 = $31.25

TAC2 =0.3125(A2)2 = 0.3125(5)2 = $7.81

– Sum of TACs = $39.06, which represents the value of resources

given up by society to clean up the pollution
 Model

– Use MACs to prove that the uniform standard is not cost-effective

– Solution
– With uniform standards, the MACs are not equal
– MAC1 = 2.5(5) = $12.50
– MAC2 = 0.625(5) = $3.125
– Shows that Polluter 2 has a cost advantage
– The 5th unit of A (i.e., the marginal unit) costs Polluter 2 $9.37 less than it
costs Polluter 1
– It would be cheaper if Polluter 2 did more of the abating, but it lacks an
incentive to do so
 Equimarginal principle

– Where there are multiple emissions sources producing the same effluent, the
equimarginal principle must hold

– The principle states that in order to get the greatest reductions in total emissions
for a given total abatement cost, the different sources of emissions must be
controlled in such a way that they have the same marginal abatement costs

– This means that different sources of a pollutant would normally be controlled to

different degrees, depending on the shape of the marginal abatement cost curve
at each source
Equimarginal
principle

– A major problem with standards is that there is

almost always an overwhelming tendency for
authorities to apply the same standards to all
sources
– It makes their regulatory lives much simpler, and it
gives the impression of being fair to everyone
because all are apparently being treated alike
– But identical standards will be cost-effective only in
the unlikely event that all polluters have the same
marginal abatement costs
 Model
– Find the cost-effective abatement, A1 and A2
– Solution: uses 3 simple steps
(i) Set MAC1 = MAC2
2.5A1 = 0.625A2
An application of the equimarginal principle of optimality
(ii) Set A1 + A2 = Abatement Standard
A1 + A2 = 10
(iii) Solve equations (i) and (ii) simultaneously
2.5 (10 - A2) = 0.625A2
25 - 2.5A2 = 0.625A2, so A1 =2 A2 =8
– Prove that this is cost-effective
MAC1 = 2.5A1 = 2.5(2) = $5.00
MAC2 = 0.625A2 = 0.625(8) = $5.00
 Model

– Show that total abatement costs are lower at this abatement

allocation than the costs when a uniform standard is used
– Solution
– TAC1 = 1.25(2)2 = $5.00
– TAC2 = 0.3125(8)2 = $20.00
–  TACs (cost-effective) = $25.00
–  TACs (uniform standard)= $39.06
– Cost Savings= ($39.06 - $25.00) = $14.06
 Graphical Model
MAC1 MAC2
25.00

6.25
5.00 5.00

0 2 10
Polluter 1’s Abatement

10 8 Polluter 2’s Abatement 0

Further Observations

– Problem: Public officials will not know where to set firm-

specific standards without knowing MAC for every
polluter

– Implies that a cost-effective solution is virtually

impossible under CAC framework

– Result is possible using market approach

 Further Observations

– Standards are usually designed to be applied uniformly across

emission sources

– This practice is almost inherent in the basic philosophy of the

standards approach, and to many people this strikes them as
an equitable way to proceed
 Further Observations

– But if marginal abatement costs in the real world vary across

sources, as they usually do, the equal-standards approach will
produce less reduction in total emissions for the total compliance
costs of the program than would be achieved with an approach
that satisfied the equimarginal principle

– The greater the differences in marginal abatement costs among

sources, the worse will be the performance of the equal-
standards approach
Standards and Incentives

An important issue for any policy is whether it creates

incentives for sources to reduce emissions to efficient
levels and in cost-effective ways

The command and-control approach based on

standards is seriously deficient in this regard

A basic problem is that standards are all or nothing;

either they are being met or they are not

If they are being met, there is no incentive to do

better than the standard, even though the costs of
further emission reductions may be quite modest
Standards and
Incentives

– By the same token, the incentives are to meet the standards,

even though the last few units of emission reduction may be
much more costly than the damages reduced
– It is easy to deal with the case of technology standards
– Here, the incentives to find cheaper ways (considering all
costs) of reducing emissions are effectively zero
– If control authorities dictate in detail the specific technology
and practices that polluters may legally use to reduce
emissions, there are no rewards to finding better approaches
SUMMARY

– The most popular approach to environmental

pollution control historically has been the setting of
standards
– This has been called the command-and-control
approach because it consists of public authorities
announcing certain limits on polluters, then
enforcing these limits with appropriate enforcement
institutions
– We specified three primary types of standards:
ambient, emission, and technology
SUMMARY
– Initial discussion centered on the level at which standards should
be set and the regional uniformity of standards

– A leading problem with standard setting is the question of cost-

effectiveness
and the equimarginal principle

– In most standards programs, the administrative bias is to apply

the same standards to all sources of a particular pollutant

– But pollution control can be cost-effective only when marginal

abatement costs are equalized across sources

– When marginal abatement costs differ among sources, as they

almost always do, uniform standards cannot be cost-effective
SUMMARY

– In practice, differences among sources in their marginal

abatement costs often are recognized informally by local
administrators in applying a uniform
national standard

– We dealt at length also with the question of the long-run impact

of standards
through their effects on the incentives to look for better ways of
reducing emissions

– Technology standards completely undermine these incentives

– Emission standards do create positive incentives for R&D in

pollution control, although we will see that these are weaker than
those of economic-incentive types of pollution-control policies,
the subject of the next two chapters
Questions for Further
Discussion

1. Environmental protection programs are frequently

designed to require all polluters to cut back emissions
by a certain percentage. What are the perverse
incentives built into this type of program?
2. If emission standards are ruled out because of, for
example, the impossibility of measuring emissions (as
in nonpoint-source emissions), what alternative
types of standards might be used instead?
3. It is sometimes suggested that the most equitable way
to resolve issues in international trade agreements
would be for all countries to adopt the same emission
standards. What are the pros and cons of this from an
economic standpoint?