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Do Lower Prices For Polluting Goods Make Environmental Externalities Worse?

Listed author(s):
  • Brennan, Timothy


    (Resources for the Future)

Lower prices for polluting goods will increase their sales and the pollution that results from their production or use. Conventional intuition suggests that this relationship implies a greater need for environmental policy when prices of "dirty" goods fall. But the economic inefficiency resulting overproduction of polluting goods may fall, not rise, as the cost of producing those goods falls. While lower costs exacerbate overproduction, they also reduce the difference between private benefit and the total social cost--the sum of private and external costs--associated with that overproduction. The author of this paper derives a test, based on readily observed or estimated parameters for conditions in which the latter effect outweighs the former. In such cases, making a dirty good cheaper to produce may reduce the need for pollution policy. This test, with minor modifications, can be applied where the dirty good is not competitive, demand rather than supply drives the increase in output, and abatement in production can reduce pollution. The analysis may speak to whether stricter air pollution regulations should accompany policies to reduce electricity costs by making power generation more competitive.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-99-40.

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Date of creation: 01 May 1999
Handle: RePEc:rff:dpaper:dp-99-40
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  1. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
  2. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, January.
  3. Timothy Brennan, 1996. "Is Cost-of-Service Regulation Worth the Cost?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 3(1), pages 25-42.
  4. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, October.
  5. Bohi, Douglas R. & Burtraw, Dallas, 1992. "Utility investment behavior and the emission trading market," Resources and Energy, Elsevier, vol. 14(1-2), pages 129-153, April.
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