Environmental pollution is the addition of any substance (solid, liquid or gas) or forms of energy (heat, sound or radioactivity) to the environment at a rate which is faster than the rate at which the substance/ energy can decompose naturally. Pollution is one of the biggest problems faced by modern society, not only does it impact the health and well-being of living beings, it has serious effects not only on the macro-economic level, for example impacts the GDP of a country, but also affects house-hold costs (microeconomy) because of frequent visits to the hospital.
The causes of pollution are rampant industrialization, deforestation, burning of fossil fuels and so on. The reasons for high levels of pollution to persist are firstly non-compliance of government norms by industries and also bad enforcement of these laws due to corruption and second the whole populace shares a significant part of nature’s administrations, so nobody individual assumes liability of keeping it clean.
Pollution is a negative externality. Externality is a concept where a third party is affected in a transaction between seller and buyer. When factories release their effluents without treatment, they cause serious damage to the river and the government and people around the river incur the cost cleaning it up and also incur health care cost because of pollution. These “social costs” are not added in the cost of production as the industry offsets the cost to society. An example for this is the impact of air pollution on India’s GDP. Rising air pollution has impacted the health of labourers and people around the factory. Therefore, premature deaths of labourers due to air pollution has risen the welfare costs and the cost of labour, which puts India’s GDP loss at more than 9% (around $100 billion). Similarly, the pollution of river Ganga affects the economic activities taking place along the river such as Agriculture, Fishing and tourism.
Below is a typical graph of a negative externality
Figure 1: Graph showing a Negative externality
As you can see from the demand-supply curve, the Social marginal cost is greater than Private marginal cost, which is a typical of a negative externality. This system is socially inefficient as Q1- SMC (social marginal cost) ; SMB (social marginal benefit). The system is efficient at Q2 where social marginal benefit cost= social marginal cost. The deadweight loss is the cost which industry transfers to the society. This is a market failure as the company over produces by using society’s sparse resources. They do not include the society’s cost in their cost of production. At a macroeconomic level this is a huge loss to the society and a country.
Control of pollution using economic measures
There are different approaches in controlling pollution and they can broadly divided into two categories, Direct and indirect control.
Direct control includes setting of pollution norms by government authorities to control pollution for example banning of plastics in certain cities, controlling the release levels of harmful gases like SOx and NOx into the atmosphere, liquid effluents release into water bodies, etc. The usefulness of norms is that it helps government keep a check on the amount of pollutant released and thereby reducing the marginal society cost. Pollution control by industries requires substantial investments and also an increase in the cost of production. If we take the example of the release of liquid pollutants into water bodies, the industry needs to invest in an effluent treatment plant, for which labour costs, chemicals costs, utilities cost adds up. This in turn increases the cost of production of the industry which reflects in the increase in the price of goods. This helps in moving the private marginal cost line shown in graph 1 to move to the left, thereby reducing the cost incurred by the society.
There are a few problems with direct control, one issue is that the government has different yardstick for different industries. The yardstick is based on the contribution of the industry to the growth of the country for example the environmental standards are easier on steel industries than chemical plants.
The trade-off between economic output and environmental protection can be analysed by a production possibility frontier (PPF) chart such as shown in the figure below.
Figure 2: A typical PPF chart
It depends on the society and country to choose the point on the curve they want to follow. If a country chooses point P, they will have high economic output but compromise on environmental protection. On the other side of the spectrum is point T where the economic output is low but the environmental protection is high. The optimized point is R, where there is a balance between economic output and environmental protection. Developing countries like India, Brazil who place a higher importance on economic output most probably will choose points P, Q and R. R, S and T points are chosen by developing countries like European countries, USA, Canada, etc, where emphasis on quality of living therefore importance is given on environmental protection. Point M is undesirable by all countries.
Imposition of taxes on the producer for each unit produced will help decrease the production and thereby reducing the environmental impact. The downside of this is that the producer increasing the prices. Perfect example for this is the introduction of green tax by the Indian government on car sales. This was a move by the Indian government to reduce the consumption of fossil fuels by the automobile industry in turn to reduce greenhouse gas emissions. The move was followed by an increase in the price of the cars, but the demand for buying cars has not decreased drastically.
If a manufacturer in a particular industry leads the way in bringing innovative methods in controlling pollution with good economic growth, other players in a competitive market will definitely follow. There are several examples for this, one example is the introduction of hybrid cars. Toyota introduced the fuel- efficient hybrid cars which consumes lesser quantities of petrol and thereby reducing emissions. Now all the major competitors of Toyota like Honda, Hyundai, BMW have all entered into the hybrid cars industry. This is a positive way the market helps in controlling pollution.
In light of global warming and other environmental issues Sustainable development is the best way forward to strike a balance between economic growth and environmental protection. Development which considers the needs of the present generation without discounting the needs of the future.