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Efficient Pollution Regulation: Getting the Prices Right*

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Author

Listed:
  • Nicholas Z. Muller
  • Robert Mendelsohn

Abstract

This paper argues for efficient environmental regulations that equate the marginal damage of pollution to marginal abatement costs across space. The paper estimates the source-specific marginal damages of air pollution and calculates the welfare gain from making the current sulfur dioxide allowance trading program for power plants more efficient. The savings from using trading ratios based on marginal damages are between $310 and $940 million per year. The potential savings from setting aggregate emissions efficiently and from including more sources of air pollution are many times higher. (JEL H23, Q53, Q58)

Suggested Citation

  • Nicholas Z. Muller & Robert Mendelsohn, 2009. "Efficient Pollution Regulation: Getting the Prices Right," American Economic Review, American Economic Association, vol. 99(5), pages 1714-1739, December.
  • Handle: RePEc:aea:aecrev:v:99:y:2009:i:5:p:1714-39
    Note: DOI: 10.1257/aer.99.5.1714
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    References listed on IDEAS

    as
    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    2. Krupnick, Alan J. & Oates, Wallace E. & Van De Verg, Eric, 1983. "On marketable air-pollution permits: The case for a system of pollution offsets," Journal of Environmental Economics and Management, Elsevier, vol. 10(3), pages 233-247, September.
    3. Thomas H. Tietenberg, 1980. "Transferable Discharge Permits and the Control of Stationary Source Air Pollution: A Survey and Synthesis," Land Economics, University of Wisconsin Press, vol. 56(4), pages 391-416.
    4. Curtis Carlson & Dallas Burtraw & Maureen Cropper & Karen L. Palmer, 2000. "Sulfur Dioxide Control by Electric Utilities: What Are the Gains from Trade?," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1292-1326, December.
    5. Viscusi, W Kip & Aldy, Joseph E, 2003. "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," Journal of Risk and Uncertainty, Springer, vol. 27(1), pages 5-76, August.
    6. Janusz R. Mrozek & Laura O. Taylor, 2002. "What determines the value of life? a meta-analysis," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 21(2), pages 253-270.
    7. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    8. Freeman, Jody & Kolstad, Charles D., 2006. "Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience," OUP Catalogue, Oxford University Press, number 9780195189650.
    9. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
    10. Ger Klaassen & Finn Førsund & Markus Amann, 1994. "Emission trading in Europe with an exchange rate," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 4(4), pages 305-330, August.
    11. R. Scott Farrow & Martin T. Schultz & Pinar Celikkol & George L. Van Houtven, 2005. "Pollution Trading in Water Quality Limited Areas: Use of Benefits Assessment and Cost-Effective Trading Ratios," Land Economics, University of Wisconsin Press, vol. 81(2).
    12. 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.
    13. Mendelsohn, Robert, 1980. "An economic analysis of air pollution from coal-fired power plants," Journal of Environmental Economics and Management, Elsevier, vol. 7(1), pages 30-43, March.
    14. Mendelsohn, Robert, 1984. "Endogenous technical change and environmental regulation," Journal of Environmental Economics and Management, Elsevier, vol. 11(3), pages 202-207, September.
    15. Richard Schmalensee & Paul L. Joskow & A. Denny Ellerman & Juan Pablo Montero & Elizabeth M. Bailey, 1998. "An Interim Evaluation of Sulfur Dioxide Emissions Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 53-68, Summer.
    16. Muller, Nicholas Z. & Mendelsohn, Robert, 2007. "Measuring the damages of air pollution in the United States," Journal of Environmental Economics and Management, Elsevier, vol. 54(1), pages 1-14, July.
    17. repec:reg:rpubli:282 is not listed on IDEAS
    18. Mendelsohn, Robert, 1986. "Regulating heterogeneous emissions," Journal of Environmental Economics and Management, Elsevier, vol. 13(4), pages 301-312, December.
    Full references (including those not matched with items on IDEAS)

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    Replication

    This item has been replicated by:
  • Art Fraas & Randall Lutter, 2012. "Efficient Pollution Regulation: Getting the Prices Right: Comment," American Economic Review, American Economic Association, vol. 102(1), pages 602-607, February.
  • More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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    1. Efficient Pollution Regulation: Getting the Prices Right (AER 2009) in ReplicationWiki

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