Chapter 4: Conventional Solutions to Environmental Problems: The

Command-and-Control Approach

I. Use of Standards in Environmental Policy

Standards are the fundamental basis of most environmental policies. In the United
States, setting standards follows a lengthy set of procedures involving scientific
research and a series of formal reviews. The EPA is charged with oversight of these
tasks and for making a formal recommendation about how these standards are to be
defined. Ultimately, the standards are legislated by Congress and subsequently
monitored for compliance and enforced by the EPA ().

1. Types of Environmental Standards

1). When environmental standards are defined in the law, they can be specified as
ambient standards, technology-based standards, or performance-based
standards.

2). Ambient standards designate the desired quality level of some element of the
environment, such as the outdoor air or a body of water. These standards typically
are expressed as a maximum allowable concentration of some pollutant in the
ambient environment. In each case, the ambient standard is not directly
enforceable but serves as a target to be achieved through a pollution limit, which
in turn is implemented through one of the other types of standards.

3). As its name implies, a technology-based standard stipulates the type of

abatement control that must be used by all regulated polluting sources.
a. In the U.S., the EPA is responsible for researching available technologies and
evaluating their relative effectiveness in accordance with certain criteria outlined
in the law. It then selects the
besttechnology, which subsequently must be
adopted by all regulated polluters.
b. The motivation is straight-f orwa r
dt oe nsureas pec i
ficlimi tonpol l
ution
releases by controlling how that limit is to be achieved.

4). An alternative type of environmental standard is performance based. A

performance-based standard specifies an emissions limit to be achieved by
every regulated polluter but does not stipulate the technology to be used to
achieve that limit. By definition, performance-based standards are more flexible
than their technology-based counterparts. They implicitly allow polluting sources
to choose how they will reduce pollution released, as long as they meet the

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 statutory emissions limit.

2. Economic Implications of Using Standards

1). There are two important economic implications to be considered. The first
deals with the level at which standards are set. From an economic perspective, the
relevant issue is whether that level achieves allocative efficiency.

2). A second implication of using standards relates to how they are implemented
across polluting sources.

3). Policy implementation is concerned with the selection of control instruments,

such as pollution limits or taxes. The decision determines not only whether the
objectives are realized but also whether they are achieved in a cost-effective
manner. If not, resources are wasted.

Are the standards being used to define environmental objectives set at a level
that is allocatively efficient? That is, does the marginal social cost of pollution
abatement equal the marginal social benefit?
Given some predetermined environmental objective, is the implementation of
that objective conducted in a cost-effective manner?

II. Are Environmental Standards Set at an Allocatively Efficient

Level?
Because standards define environmental objectives, it is important to determine
whether these objectives are set to achieve allocative efficiency. This condition holds
if resources are allocated such that the associated benefits and costs to society are
equal at the margin.

1. Marginal Social Benefit of Abatement

From a market perspective, the MSBofa bateme ntiss
oc iety
sdemand for pollution
abatement, or, equivalently, its demand for environmental quality.

2. Marginal Social Cost of Abatement

On the supply side, we need to model the costs to society as polluters reduce their
releases of contaminating residuals. This relationship is referred to as the marginal
social cost (MSC) of abatement.

3. Firm-Level Marginal Abatement Cost

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 1). To allow for the fact that polluters choose from a menu of available abatement
methods, we model what is conventionally called a marginal abatement cost
(MAC) function. The MAC measures the change in economic costs associated
with increasing pollution abatement (A).

Fi
gur
e4.
1Si
ngl
ePol
lut
er
sMa
rgi
nal
Aba
teme
ntCos
t(MAC)

2). The introduction of a cost-saving abatement technology would pivot the MAC
curve downward, as shown in figure 4.2

Figure 4.2 Effect of Cost-Sa

vin
gTe
chn
ologyont
hePol
lut
er
sMACCu
rve

4. Market-Level Marginal Abatement Cost

Thea gg re ga
tionofal
lpoll
ute
rsMACsrepr
e sent
sthemarket-level MAC (MAC
mkt) de fine dasthehori
zont
alsum ofe
achpol l
ute
rsMAC,orMACmkt =MACi
for all i firms.

5. Marginal Cost of Enforcement

To the MAC mkt function we need to add the marginal costs incurred by government
for enforcing and monitoring abatement activities. This component is commonly
referred to as the marginal cost of enforcement (MCE).

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 Figure 4.3 Deriving the Marginal Social Cost of Abatement

Figure 4.4 U.S. Pollution Abatement and Control Expenditures

6. Are Abatement Standards Set Efficiently?

1). The efficient level of abatement (AE ) occurs at the intersection of the MSB
and MSC curves shown in Figure 4.5 below.

Figure 4.5 Allocatively Efficient Amount of Pollution Abatement

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 2). Whether or not the government sets environmental standards to achieve this
level depends on a variety of considerations. Four factors in particulars in
particular suggest that this outcome is highly unlikely: (1) the existence of
legislative constraints, (2) imperfect information, (3) regional differences, and (4)
nonuniformity of pollutants.

Legislative Constraints
The reality of a standards-based approach is that it does not necessarily set
pollution limits to account for the associated benefits and costs.

Imperfect Information
a. Even when a cost-benefit balancing is called for by law, the absence of full
information would likely prevent the government from identifying the MSB and
MSC of abatement.

b. There are similar problems in identifying the MSC. In addition to estimating

the MCE, the government also would have to know the MAC for every polluter.
Obtaining this firm-level information would be virtually impossible, given the
diversity of production and abatement techniques across polluting sources.
Furthermore, the MAC must also account for the implicit costs of abatement,
which are difficult to quantify. In this context, implicit costs would include any
unemployment associated with production declines, the potential loss of
consumer choice if products were eliminated or altered, and any price and
income effects arising from abatement requirements.

c. In the absence of perfect information, it is highly probable that the

government will unknowingly establish the abatement standard at some level
other than the allocatively efficient one, even if that was the legislated intent.

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 Figure 4.6 Setting and Environmental Quality Standard: Is It Allocatively Efficient?

Regional Differences
Consider two hypothetical regions X and Y that have identical MSC functions
(i.e., MSCX = MSCY) but different MSB functions, such that MSBX is lower
than MSBY at all abatement levels. Such a disparity might be due to differences
in income, education, or population across the two locations. In any case, at
most, only one of the two locations would consider a nationally determined AE
as efficient. Look at Figure 4.7, which superimposes the MSB and MSC for
each region on the same diagram. The allocatively efficient level of abatement
in region X (AX) is much lower than that for region Y (AY). So there is no way
that a single national standard of abatement even one that is efficient on a
national level would be optimal for both regions.

Fig. 4.7 Effect of Regional Differences on Achieving Allocative Efficiency

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 Nonuniformity of Pollutants
a. An inefficient outcome also can arise within the same region if changes in
releases from polluting sources do not have a uniform impact on the
environment. This can occur if the relationship between the change in pollutant
releases and the change in exposure is nonlinear, or not directly proportional.

b. The nonuniformity also can arise when polluting sources are located at
varying distances from an exposed population or ecosystem, even if their
pollution releases are identical.

III. General Approaches to Implementing Environmental Policy

It is possible that even a nonoptimal environmental standard can be implemented
using the least amount of resources. If so, the policy is said to be cost-effective.
Whether or not this second-bestcriterion is met depends on the method used to
bring about the desired reduction in pollution.

One is the command-and-control approach, which uses pollution limits or

technology-based restrictions to directly regulate pollution sources. The second is the
market approach, which uses incentive-based policy tools to motivate abatement
through market forces.

Of the two, the command-and-control approach is the more conventional, and it

dominates environmental policy in most countries. This nearly universal reliance on
direct regulation seems to have evolved from an attempt to gain immediate control of
what was initially an unfamiliar and urgent social dilemma. Although well intentioned,
the use of inflexible regulations and pollution limits, often imposed uniformly across
all polluters, has not met with consistent success.

IV. Is the Command-and-Control Approach Cost-Effective?

The practical way to assess whether the command-and-control approach is
cost-effective is to determine whether society is incurring higher costs than necessary
to achieve a given level of environmental quality.

1. Cost-Ineffectiveness of the Technology-Based Standard

The technology-based standard potentially prevents the polluter from minimizing
the costs of achieving a given abatement level. Remember that the MAC curve is

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 defined under the assumption that the polluter selects the least-cost available
method. If the government forces polluters to use a specific technology to meet an
emissions limit, it is impeding the firm
s incentive to abate in a cost-effective
manner. Useless the mandated technology happens to be the least-cost abatement
approach for all polluters.

2. Cost-Ineffectiveness of Uniform Standards

1). Under a strict command-and-control framework, standards often are imposed
uniformly across groups of polluting sources. The operative question is whether
such a policy approach is cost-effective. The answer? The use of uniform
standards across polluting sources will waste economic resources as long as
abatement cost conditions differ among those sources. Of course, the reality is that
there are many factors that might give rise to such differences. One is the age of
the polluter
s physical plant. Newer facilities typically are designed and built with
the most advanced pollution control equipment, making them capable of meeting
an abatement standard at a much lower marginal cost than their less modern
counterparts. Another relevant factor is regional differences in input prices.

2). By accepting that abatement costs will likely differ among polluters, we need
to explore why this makes the use of uniform standards cost-effective. The
problem is that uniform standards force high-cost abaters to reduce pollution as
much as low-cost abaters, so more resources than necessary are used to achieve a
cleaner environment. Cost savings could be realized by having more of the
abatement accomplished by polluters who can do so at a relatively lower cost.

Example:
Assume there are only two polluting sources in a given region, each of which
generates 10 units of pollution for a total of 20 units released into the
environment. The government determines that emissions must be reduced by 10
units across the region to achieve the socially desirable level of pollution. Each
firm faces different abatement cost conditions modeled as follows:
Polluter 1s MAC: MAC1 2.5 A1 Total abatement costs: TAC1 1.25( A1 ) 2
Polluter 2s MAC: MAC2 0.625 A2 Total abatement costs: TAC2 0.3125( A2 ) 2
Case 1: The government implements the 10-unit standard uniformly, requiring
each polluter to abate by 5 units (i.e., A1 A2 5 ).
TAC1
TAC2
The total abatement costs ( TAC1 TAC2 ) in this society

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 Note that MAC1 at A1=5 is $12.5
MAC2 at A2=5 is $3.13
This implies that polluter 2 has an abatement cost advantage over Polluter 1.
Therefore, it would cheaper if Polluter 2 were to do more of the abating. Of
course, it would have to have an incentive to do this, and the two firms would
have to negotiate to arrive at some mutually beneficial agreement. However, no
such opportunity is allowed when the government forces every polluter to abate
by the same amount. Thus, we conclude that the use of uniform standards
u7nder a conventional command and control approach does not achieve the
cost-effectiveness criterion as long as MAC conditions differ across polluter.

Case 2 : Could the government reallocate abatement levels across the two
polluters to achieve a cost-effective solution?
Step 1. set MAC1 MAC2 2.5 A1 0.625 A2
Step 2. set A1 A2 abatement standard A1 A2 10
Step 3. Solve the equations simultaneously A1 ? A2 ?

Figure 4.8 Cost-Effective Solution in a Two-Polluter Model

3). If each polluter were to abate to the point where the corresponding level of
MAC is equal across firms, the cost-effective abatement criterion would be
achieved. This means that the environmental standard would be met at minimum
cost. This result is one application of what microeconomic theory calls the

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equimarginal principle of optimality.

4). As a final point, it is reasonable to ask how in practice the government could
arrive at these firm-specific abatement standards within a common-and-control
framework. The answer is that it would have to know the abatement cost
conditions for every firm it was regulating.

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