Relatively Efficient Pollution Standards Under Perfect Competition

Abstract

The results of this article indicate that pursuit of efficiency with the use of pollution standards cannot be done by mimicking aspects of the efficiency conditions involving pollution taxes. A relatively efficient pollution standard applied to perfectly competitive firms will usually be characterized by a situation in which the marginal cost of pollution control exceeds the marginal damage of pollution, as the latter concept is conventionally measured. Furthermore, it will generally not be relatively efficient to set standards so that the marginal costs of pollution reduction are the same for all polluting firms. A relatively efficient set of standards will depend, in general, on the elasticities of supply and demand of output, as well as the shape and location of the firms' marginal cost ofpollution reduction curves. Some implications of these results for cost-benefit analysis are discussed.