Selfregulating Economic System

Another concept that affects pollution is the self-regulating economic system. Under ideal conditions all the information necessary for making the best

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Phase l

Phase 2

0

Phase S

3

a.

Less

Early

Time

Late

decisions is known. If a manufacturer made a product with thorough knowledge of all costs of production, including environmental costs, then ideal decisions could be made. But, of course, this is not possible.

The efficiency of the competitive market depends on private costs (such as direct manufacturing expenses) and social costs (such as resulting pollution) being the same. When they are not equal, and when some of the costs are not known (i.e., some costs of pollution), the competitive market is not able to run at its maximum social efficiency. Thus, the failure to factor in all costs and benefits in the market can lead to pollution and environmental deterioration. Such inefficiencies of the market have produced pollution in many forms, including greenhouse gases and radioactive wastes.

U-shaped hypothesis. A widely held view by environmental economists is that economic growth does inevitably lead to the increasing pollution of air, water, and land. However, a diversion of resources to pollution control and general environmental objectives will eventually follow. That is, as prosperity increases (based on rising gross domestic product per capita), a more closely watched environmental program slowly replaces the former lack of concern with the environment. Evidence of this inverted U-shaped graph is already clear in many developed countries, such as the United States and England. See the graph for an an illustration of the hypothesis.

In phase one a country begins to develop, and growth (increasing at a rapid pace) exceeds pollution. Greenhouse gases, radioactive wastes, and pollution in small bodies of water start to increase. In phase two a country begins to mature, and pollution equals growth (although growth continues to increase). Pollution and wastes have accumulated and pollution becomes noticeable in larger bodies of water, such as oceans and seas. In phase three a country recognizes its pollution problems, and pollution is allowed to

SETTING THE OPTIMAL CARBON TAX LEVEL

SETTING THE OPTIMAL CARBON TAX LEVEL

Quantity of Pollution Emitted

Quantity of Pollution Emitted

At A marginal cost of abatement exceeds paying the fee so pay fee and pollute. At B the fee is more than the marginal cost so abate and don't pollute.

source: Graph developed by Professor Elizabeth Bogan at the Princeton Department of Economics.

Inverted U-shaped hypothesis.

decrease along with increasing growth. Measures to counteract pollution are instituted, such as sanitation, treatment, regulations, and zoning.

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