(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 691

666 PART • Information, Market Failure, and the Role of Government to quantify, automobile manufacturers are now offering acid-resistant paint on new automobiles at an average cost of $5 per car, or $61 million for all new cars and trucks sold in the United States What about the costs of achieving reductions in sulfur dioxide emissions? To achieve these reductions, firms need to put emissions-control equipment into use The incremental cost of achieving some emissions reduction is likely to be small, but that cost increases as greater and greater investments in capital equipment are needed to achieve further reductions An example of the costs and benefits of reducing sulfur dioxide emissions is given in Figure 18.3, which is based on a study of pollution abatement in Philadelphia.3 It is easiest to read the graph from right to left, since we are looking to see how much of a reduction in sulfur dioxide concentrations from the existing level of 08 parts per million is socially desirable The marginal abatement cost curve is increasing (from right to left); it jumps whenever new capital-intensive pollution-control equipment is needed to improve fuel efficiency The marginal external cost curve reflects (again reading from right to left) the incremental reduction in the harms caused by acid rain For moderate concentrations, studies of respiratory diseases, corrosion of materials, and lost visibility suggest that marginal social costs are high and relatively constant However, for very low concentrations, the marginal external cost declines, and eventually there are relatively few adverse health, material, or aesthetic effects The efficient level of reduced sulfur dioxide emissions is given by the number of ppm at which the marginal cost of reduced emissions is equal to the marginal external cost We can see from Figure 18.3 that this level is approximately 0275 ppm To sum up, there are clearly substantial benefits to reducing sulfur dioxide emissions What if any policies are best utilized to achieve those reductions efficiently? We will return to these questions after we consider a variety of policy options for the treatment of externalities in Section 18.2 Dollars 60 per unit of reduction F IGURE 18.3 40 SULFUR DIOXIDE EMISSIONS REDUCTIONS The efficient sulfur dioxide concentration equates the marginal abatement cost to the marginal external cost Here the marginal abatement cost curve is a series of steps, each representing the use of a different abatement technology Marginal External Cost 20 Marginal Abatement Cost 0.02 0.04 0.06 0.08 Sulfur dioxide concentration (ppm) Thomas R Irvin, “A Cost Benefit Analysis of Sulfur Dioxide Abatement Regulations in Philadelphia,” Business Economics, September 1977, pp 12–20