All Commentary
Tuesday, May 1, 2001

The Efficient Amount of Pollution

Economic Analysis Is Crucial to Understanding and Reducing Environmental Problems

When environmentalists argue that the costs of protecting the environment should be ignored, they quickly find themselves in a box. The only way to protect environmental quality in some ways (say, reducing water pollution) is by harming it in other ways (say, increasing air pollution). To say that we should protect the environment without considering the cost is the same as saying that we should protect the environment without considering the damage done to the environment. When environmentalists take a break from silly rhetoric and get serious about improving environmental quality, they have to compare the value of alternative environmental goals; for example, clean air versus clean water. Doing this requires recognizing that, first, decisions are made at the margin (a little more clean water at the cost of a little less clean air), and, second, the marginal value of everything eventually begins to fall as we get more of it. Without these two insights from economics, an environmentalist can never get beyond providing comic relief for those who think seriously about environmental problems, which, I want to emphasize, includes some environmentalists.1 But accepting the insights of marginal analysis leads to logical conclusions that many environmentalists do not like.

Once we recognize that it’s marginal values that are relevant to our choices, and that the marginal value of all goods declines as we use more of them, it follows that environmental values don’t always trump other values. Sure, we value environmental quality. But we also value lots of other things such as warm homes in the winter; cool homes in the summer; life-saving drugs; stylish clothes; fast food; hot showers; large, roomy vehicles; jet travel; hair spray; disposable razors, diapers, and grocery bags; fast-acting detergent; contact lens solution; chemically treated lawns; and so on. The production and consumption of all these things damage the environment, but it makes sense to increase our consumption of them as long as their marginal value is greater than the marginal environmental cost. And this means consuming trinkets, gadgets, and conveniences to the point of significantly damaging the environment if environmentalists are right when claiming that maintaining environmental quality is a serious problem.

The Efficient Amount of Pollution

We can illustrate the tradeoff between environmental quality and other desirable goods with a diagram. Beginning with no pollution, the marginal value of polluting would be extremely high. Imagine not being able to discharge any bodily pollution for a few hours and think about how much satisfaction would be realized by polluting a little bit (a minute or two would be sufficient, since you discharge carbon dioxide, a greenhouse gas, with every breath). But as you increase your pollution by doing things that are less and less urgent, the marginal value of polluting declines. This decreasing marginal value of pollution is shown in the figure with the downward-sloping curve MV (the marginal value of pollution). At some point, P’ in the figure, we have done all the polluting that creates value and the marginal value of pollution is zero.

Polluting is costly, of course, because it reduces environmental quality, at least beyond some point. Perhaps the assimilative capacity of the environment is so great that we can pollute a lot before there is any loss of environmental quality, in which case the marginal cost of pollution is zero over a wide range of pollution.2 This situation is shown with the marginal cost of pollution curve, MC. When pollution first begins harming the environment, the marginal cost will be quite low, little more than aesthetically unpleasant. But as it increases, the marginal cost will also increase, with additional pollution beginning to harm plant and animal life. So the MC curve is upward sloping, as shown in the figure.

Given the values represented by curves MV and MC, what is the efficient amount of pollution (the amount that maximizes the total value derived from polluting)? When pollution is less than P”, the marginal value realized from more pollution is greater than the marginal value sacrificed, or marginal cost—additional pollution adds more value than it destroys. But beyond P”, the marginal value from more pollution is less than the marginal cost, and additional pollution destroys more value than it creates. The most net value is clearly realized when pollution is P”. At P” the marginal environmental damage is given in the figure by D”, and the total environmental damage is given by the area A (the area under MC from 0 to P”).

Many environmentalists will argue that pollution is a more serious problem than suggested by the marginal cost curve MC, with the real marginal cost curve more like MC’, showing greater cost at every pollution level. If true, then the efficient amount of pollution is reduced to P*, but the marginal environmental damage is given in the figure by D*, and the total environmental damage is given by the area B (the area under MC’ from 0 to P*). The more vulnerable the environment to the damaging effects of human activity, the more environmental damage we are justified in doing.3

Regardless of whether the efficient amount of pollution is P’ or P*, we will increase our pollution to P’ (where its marginal value is zero) without some process for making us consider the cost that our polluting activities impose on others. Our pollution problems should make all of us, especially environmentalists, appreciate the advantages of private property and market exchange, which require us to pay prices for goods and services that reflect their marginal cost. If this were the case with polluting activities, there would be no pollution problems, since pollution would be expanded only up to the efficient level, where its marginal value equals its marginal cost.

Future columns will consider the efficiency of alternative approaches to protecting the environment.

  1. An increasing number of environmentalists appreciate how economic analysis is crucial to understanding and reducing environmental problems.
  2. Some people argue that discharges of waste products into the environment aren’t pollution until they impose costs on others. This definition has advantages, but for convenience I will refer to all waste discharges as pollution even though they may not create costs until they reach a certain level.
  3. It is possible to construct MC’ so that less total environmental damage is done at the efficient amount of pollution. I leave it to the reader to determine how the MC’ has to be redrawn to get this result, and to explain why this redrawing is not very realistic.

  • Dwight R. Lee is the O’Neil Professor of Global Markets and Freedom in the Cox School of Business at Southern Methodist University.