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Factors that Determine the Efficiency Ranking of Second-Best Instruments for Environmental Regulation

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  • Raúl O'Ryan

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    Abstract

    Cost-effective policies allow minimizing the compliance costs associated to reaching a desired environmental quality target. However cost reductions associated to the use of these policies are not always significant. In this paper a conceptual model is developed to analyze explicitly the interaction among the factors that determine the compliance costs under two market based policies (the optimal ambient permit system, APS, and an emission permit system, EPS) and two CAC policies (equal percentage reduction, PER and a uniform concentration standard of emissions, STD). Considering a non-uniformly mixed pollutant the model incorporates explicitly the number of polluting sources; the size, in terms of emissions, of each process; the marginal costs of abatement for each process; the concentration of the emitted pollutant at the source; the transfer coefficient that relates emissions at each location with the impact on environmental quality at the receptor; and the desired environmental quality target. A first question addressed using the model. is how each of these factors affects compliance costs under each policy and as a result how the costs of sub-optimal policies compare with those of the optimal policy. The model shows that each factor affect the relative efficiency of each suboptimal policy quite differently. A second issue addressed is the efficiency ranking of second-best instruments under plausible values of each factor. It is shown that (1) APS is significantly less costly than the suboptimal policies in 45% of the cases; (2)EPS is very efficient in 75% of the cases, particularly when sources are clustered around the receptor; (3) a uniform standard performs well in many common situations; and PER is also efficient in some specific cases; (4) there is a high dispersion of results for cost quotients in some specific cases; and (5) relative compliance costs for PER and STD show extreme variations becoming very inefficient in some cases. Extreme values of the cost quotient for EPS are much lower.

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    File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120030326121940.PDF
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    Bibliographic Info

    Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 147.

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    Date of creation: 2002
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    Handle: RePEc:edj:ceauch:147

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    1. Russeli, Clifford S., 1986. "A note on the efficiency ranking of two second-best policy instruments for pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 13-17, March.
    2. Seskin, Eugene P. & Anderson, Robert Jr. & Reid, Robert O., 1983. "An empirical analysis of economic strategies for controlling air pollution," Journal of Environmental Economics and Management, Elsevier, vol. 10(2), pages 112-124, June.
    3. Dewees, Donald N, 1983. "Instrument Choice in Environmental Policy," Economic Inquiry, Western Economic Association International, vol. 21(1), pages 53-71, January.
    4. Atkinson, Scott E. & Tietenberg, T. H., 1982. "The empirical properties of two classes of designs for transferable discharge permit markets," Journal of Environmental Economics and Management, Elsevier, vol. 9(2), pages 101-121, June.
    5. Kolstad, Charles D., 1987. "Uniformity versus differentiation in regulating externalities," Journal of Environmental Economics and Management, Elsevier, vol. 14(4), pages 386-399, December.
    6. Krupnick, Alan J., 1986. "Costs of alternative policies for the control of nitrogen dioxide in Baltimore," Journal of Environmental Economics and Management, Elsevier, vol. 13(2), pages 189-197, June.
    7. O'Ryan, Raul E., 1996. "Cost-Effective Policies to Improve Urban Air Quality in Santiago, Chile," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 302-313, November.
    8. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    9. Bohm, Peter & Russell, Clifford S., 1985. "Comparative analysis of alternative policy instruments," Handbook of Natural Resource and Energy Economics, in: A. V. Kneese† & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 1, chapter 10, pages 395-460 Elsevier.
    10. Atkinson, Scott E. & Lewis, Donald H., 1974. "A cost-effectiveness analysis of alternative air quality control strategies," Journal of Environmental Economics and Management, Elsevier, vol. 1(3), pages 237-250, November.
    11. Tietenberg, T H, 1990. "Economic Instruments for Environmental Regulation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(1), pages 17-33, Spring.
    12. Charles D. Kolstad, 1986. "Empirical Properties of Economic Incentives and Command-and-Control Regulations for Air Pollution Control," Land Economics, University of Wisconsin Press, vol. 62(3), pages 250-268.
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