6/5/11

Question: Is there an acceptable level of pollution?


Question for today:

As an economist, how would you respond to the following statement "There is no such thing as an acceptable level of pollution"?

A. I would disagree with this statement because the market is able to allocate sufficient resources to reducing pollution to an acceptable level. Externalities are taken into account by those making market choices.

B. I would disagree with this statement because although reducing pollution
has benefits, doing so also has a cost. The optimal level of pollution is where the marginal benefit of reducing pollution just equals the marginal cost.

C. I would agree with this statement because western countries have sufficient monetary resources to invest in pollution-reducing equipment. Further, people can change their consumer choices to eliminate pollution.

D. I would agree with this statement because the word acceptable reflects a person's preferences, which are not accounted for in a market with externalities such as pollution.

image from wikipedia
 The answer here is B.  We can see this by using a typical supply and demand graph shown on the left.  Imagine that the P axis is showing the monetary benefit of pollution reduction, and Q is the amount of pollution reduction.  The demand curve shows our demand for pollution reduction, and the supply curve shows the supply of pollution reduction.  At some point it gets very expensive to clean everything up, so we only clean up to the point where our marginal benefit is equal to the marginal cost.  If we clean up (or reduce pollution) any more, than we are actually hurting the economy through the creation of deadweight loss.

So yes, the answer is there is an efficient level of pollution, the answer isn't to clean everything up, that would be expensive and absolutely nothing would ever be produced!
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