The Supply Curve

The horizontal axis is in effect a sup­ply curve of pollution opportunities. When the cost of pollution (measured on the vertical axis) is zero, the opportunities for pollution are unlimited, and events are determined simply by the demand curve. As the cost of pollution rises, the horizontal line rises, and its intersection with the demand curve moves to the left {that is, the demand for pollution falls). For any cost of pollution, supply and demand are equal at the point at which their curves intersect.

The Intersection of Supply and Demand

From an economist's point of view, the problem of excessive pollution can be looked at as an error in cost estimation: because the polluter is not charged for dumping wastes into the environment and therefore the cost of pollution is not included in the product's price, the supply curve is too low, and so the intersection of supply and demand curves \s too low. As a result, it is less expensive to pollute than to dispose of wastes properly. Given this view, economists propose a simple and straightforward solution: raise the supply curve by raising the cost of polluting. This approach is often referred to by economists as "adopting a market-oriented strat­egy" because it seeks to use the economic forces of a free market to alleviate the pollution problem.

A very popular market-oriented strategy for controlling pollution involves raising the supply to the optimum pollution value by imposing an emission charge on polluters. In effect, this charge is a tax on pollution. Several European countries, for example, have encouraged drivers to switch to unleaded gasoline by imposing extra taxes on leaded gasoline, which releases more pollutants into the air when it burns. Sweden taxes the active ingredients in pesticides. Finland and Norway impose charges on no returnable contain­ers, as do some communities in the United States. Such charges increase the cost of polluting and shift the supply curve of pollution opportunities upward. In theory, polluters react to the increase in cost caused by the emission charge by decreasing pollution, because the cost of abatement is now less than the cost of polluting. In actual practice, this approach has not been notably successful because taxes arc almost always set too Sow to have much effect on the behavior of people or companies.

    Many economists argue for a different market-oriented strategy: raising the supply curve to the optimum pollution level by issuing a fixed number of waste-discharge permits, each of which allows the holder to emit a certain amount of a given pollutant. The permits (called emission reduction credits, or ERCs) can then be freely bought and

Sold. Economists believe chat this approach is an efficient way to move the market toward the point of optimum pollution: potential polluters desiring to add more pollution to the environment will increase their costs by buying additional ERC per­mits, whereas those polluting less than the opti­mum level will sell their excess ERC permits and so lower their costs. Because using marketable permits ensures that pollution does not fall below the optimum amounts and allows firms with higher abatement cost to control their pollution less, it prevents pollution abatement from impeding eco­nomic development and achieves pollution reduc­tion at low costs.

    This approach was used by the Environmental Protection Agency (EPA) in mandating lower lev­els of lead in gasoline. Refineries were assigned quotas of lead, which they could trade with each other. Since 1974 the EPA has also issued air pollu­tion permits as marketable HRCs. When a company wishes to move into a city that fails to meet the standards of the 1970 Clean Air Act, it buys ERC polluting rights from establishing firms that have cut their own emissions. The Federal Clean Air Act of 1990 includes a similar plan to cut sulfur dioxide emissions with tradable permits for coal-burning electricity utilities. The EPA is also considering using marketable permits to phase out the manufac­ture of ozone-destroying chlorofluorocarbons.

The Problem with Free Market Economic Strategies

Although treating pollution opportunities as a commodity on the open market is an efficient economic strategy, it has been unpopular with environ­mentalists. Emission charges and marketable waste-discharge permits are thought to be poor methods of maintaining a healthy environment. Not only is pollution cost difficult to measure with any accu­racy, but the true effects of the pollution often do not enter into the calculation because they affect a third party or, frighteningly, because they are sim­ply not known.

From the point of view of sound environmental science, no economic policy that has an adverse impact on the environment should be encouraged if that impact is not completely understood. It is one thing to say that the unavoidable price of de­velopment is some lowering in environmental qual­ity, but quite another thing to say that we cannot predict how much environmental quality will be lost. Risk—the possibility of catastrophic conse­quences—is the element left out of the free market economic calculations. The interrelationships of organisms within ecosystems are not incorporated into economic theories, models, and predictions. Because such calculations produce policies that af­fect ecosystems in direct and potentially disastrous ways, it is essential that a more serious attempt be made to incorporate potential ecological risk fac­tors into economic calculations.