Relevance of Issue

As mentioned beforehand, there is significant health and ecosystem damage associated with just one of the many pollutants. Measuring this cost of environmental damage to such environmental goods such as the rainforest is hard to quantify. This is because there’s considerable debate over how or whether to quantify such natural goods in economic terms. But it’s not impossible to get a good estimate on how much an environmental good such as clean water is valued at, and thus how much of a cost water pollution poses. There are imprecise, but somewhat scientific methods such as hedonic pricing, stated preferences, travel cost studies, and dose response methods. (Hanley, 47-61) One such cost valuation study examined the impact of global warming. The cost in damages due to carbon dioxide was determined to be $1-$6 per ton emitted (Hanley, 286). That is a wide spread, but it gives economists and policymakers something to work from.

There is also the added economic benefit of that cap-and-trade regulation usually saves considerable sums of money when compared with command-and-control regulation. In the case of the Acid Rain program, it was projected to save $300 million just in its first couple of years. That substantial figure doesn't even include the economic savings of foregone damages (Schmalensee, 64). In theoretical economics terms, the cap and trade mechanism guides the market towards the point where all externalities are accounted for and reflected in the cost and benefit curves. At this optimal point (the Lindahl equilibrium) Marginal Social Benefits equals Marginal Social Costs. In this perfect situation, the tragedy of the commons with its free-riding problems is avoided. In summation, the employment of Tradable Pollution Permits (TPPs ) markets to combat market failures (externalities) is like fighting fire with fire: market solutions can help solve market failures.

Next to Components

Back to Correcting Externalities: Pollution