Geoffrey Brennan
580 California St., Suite 400
San Francisco, CA, 94104
Pollution and Resource Allocation: Reply
1975, Australian Journal of Agricultural and Resource Economics
https://doi.org/10.1111/J.1467-8489.1975.TB00152.Xvisibility
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Abstract
A us f ralian Nation a1 University Richardson's comments on our analysis of the pollution problem [ 11 appear to contain three distinct strands. Firstly, Richardson accuses us of failing to allow for the possibility of controlling pollution at any point in the production-consumption process other than that at which physical commodities are actually produced. Secondly, he is critical of our failure to deal specifically with recycling as a possible solution to the pollution problem. Finally, he questions whether conclusions about appropriate policy responses to pollution can be generated from a discussion of general principles. Each strand seems to demand some response on our part, and we consider each in turn. I t seems clear that Richardson sees our focus on the question of controlling pullution 'at source' as a crucial departure from generality.
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POLLUTION AND RESOURCE
ALLOCATION: REPLY
TONY CHISHOLM, CLIFF WALSH and GEOFFREY BRENNAN
A usfralian Nation a1 University
Richardson’s comments [2] on our analysis of the pollution problem
[ 11 appear to contain three distinct strands. Firstly, Richardson accuses
us of failing to allow for the possibility of controlling pollution at any
point in the production-consumption process other than that at which
physical commodities are actually produced. Secondly, he is critical of
our failure to deal specifically with recycling as a possible solution to
the pollution problem. Finally, he questions whether conclusions about
appropriate policy responses to pollution can be generated from a
discussion of general principles. Each strand seems to demand some
response on our part, and we consider each in turn.
I t seems clear that Richardson sees our focus on the question of
controlling pullution ‘at source’ as a crucial departure from generality.
‘. . . This model places emphasis on controlling pollution at source,
i.e. in the production process, thus ignoring the possibility of control
at a subsequent point, namely after the consumption activity’ [2, p. 11.
But, as even a moderately casual reading of our article would reveal,
this criticism is based on a gross misunderstanding and misrepresentation
of what we say. Certainly, there is nothing in the structure of our model
that rules out control of pollution at or beyond the point of consumptiion.
Throughout our discussion, we emphasize the importance of viewing
the production-consumption process for physical consumption goods as
a whole; and it is perfectly clear that pollution control policies, designed
to change the balance between physical goods and ‘clean environment’
can be applied at any point in the chain. It is true that we draw a
distinction between adjustments to pollution by the ‘victims’ of the
negative externality ‘. . . at the point of damage’ and adjustments by the
externality-generating agents ‘. . . at source’. This distinction is essentially
that between responses to pollution at the point in the consumption or
production process where residuals cause a perceived nuisance (the
point of damage), and those which occur at the point where residuals
are produced ‘. . . simultaneously with the production and consumption
of physical goods’ ([ 1, p. 71 emphasis added). Yet, Richardson seems
to believe that our model equates the ‘source’ of pollution with the
production process alone. This definition of ‘source’ is his, ‘not ours-
it is in no way a definition that is suggested by our discussion, and its
relevance to our analysis lies entirely in Richardson’s imagination.
Since there seems to be some confusion about this point, however,
it may be useful to re-emphasize the reasons for our distinction between
adjustments at ‘source’ and elsewhere. Typically, adjustments to
pollution by receptors at the point where damage occurs-adjustments
such as moving away from the pollution source, installing air cleaning
or conditioning devices and so forth-are private in nature. These
responses will occur naturally in the freely operating market whenever
the private marginal gains exceed the private marginal costs of adjust-
122
1975 POLLUTION RESOURCE ALLOCATION 123
ment. By contrast, adjustments by the externality-generating agents,
whether by producers or consumers (i.e. adjustments ‘. . . at source’ in
our terminology), are typically public in nature, in the sense that the
benefits of such adjustments are equally and totally consumed by all the
afEscted parties. These are not responses which one would, in general,
expect to emerge naturally in a freely operating market. To the extent
that responses at source are least social cost (most efficient), there will
be a case for government intervention via regulation or fiscal instruments
-although, as we are at pains to point out in the latter part of our
article, this case is only a weakly presumptive one.
Thus, the distinction between pollutim adjustments at source and
those at the point of damage is of considerable policy significance, for
it is only in so far as adjustments at source are the more efficient that a
case for public intervention can be made. The distinction between
pollution from production activities and pollution from consumption
aotivities (i.e. between production and consumption wastes) by contrast
seems to us to be of no policy significance whatsoever. And the fact
that we did not provide a separate analysis of each in our paper is, we
believe, a reflection of the generality of our approach, rather than the
opposite as Richardson implies.
Turning to the second issue raised by Richardson, it is true that we
did not explicitly consider the possibility of recycling. Such neglect was
deliberate. The focus of our paper related to the question of market
failure and the associated question of appropriate pollution policies. To
the extent that recycling, of both consumption and production wastes,
is economically viable in the freely operating market it will occur
naturally and hence lies outside the concern of our discussion. The
recycling issue only becomes relevant for policy purposes if one or other
of two possibilities occur. The first is that the freely operating market
sets prices for so-called ‘exhaustible’ resources improperly so that their
rate of exploitation over time is non-optimal: in this case, recycling
decisions based on market prices will also be inefficient. But we made
it quite clear in our original discussion that the problems of optimal
pricing and rate of exploitation of exhaustible resources lay outside the
scope of our paper.
The second possibility is that, although recycling is not economically
viable at current market prices, it may become efficient when appropriate
taxes or regulations on wastes disposal are imposed. In this case,
however, it is the absence of these policy instruments to internalize the
externality that gives rise to inefficient recycling decisions. In other
words, the recycling possibility (like a whole range of other feasible
methods of adjustment that serve to minimize residuals generated per
unit of physical product) only emerges in response to government policies,
if it emerges at all. Whether recycling or some other change in technique
is most efficient depends of course on the particular case. The important
point is that if the correct policy choice is made (e.g. the appropriate
Pigovian damage tax), the polluting agents themselves will make the
correct adjustments.l If one accepts this, then the isolation of the ‘correct
1 T h e implementation of a ‘correct policy’ will commonly induce a polluting
agent to simultaneously use a number of methods of pollution control, including
perhaps recycling. In these circumstances, when optimal adjustments have been
made, the marginal social benefit from pollution abatement will equal the marginal
composite cost of pollution abatement, and the marginal cost of pollution abate-
ment by each method in use also will be equal to the marginal social benefit.
124 AUSTRALIAN JOURNAL OF AGRICULTURAL ECONOMICS AUG.
poIicy’-and not the best response to it by firms and consumers-
becomes the crucial policy issue.2 We adhere to our belief that recycling
is not in itself relevant to the central policy question.
Finally, we cume to the matter of whether a discussion of general
principles is capable of indicating a preference for fiscal over regulatory
instruments in the pollution context. To be sure, there will be cases
where regulations may be more appropriate and nothing in our paper
denies that p~ssibility.~ Our conclusion was simply a response to a
persistent trend in the way logic appeared to take us (particularly in our
armments about information and measurement) favouring the use of
fiscal instruments. Richardson’s discussion has not in any way served to
indicate that such a general conclusion may be inappropriate.
Generally speaking, we believe that the presumption in favour of
fiscal instruments over regulations must be allowed to stand, and that
the relative neglect of these instruments by policy makers, in favour of
direct regulations, cannot be easily justified in efficiency terms. A serious
question is therefore raised as to whether society is currently bearing
unnecessarily large costs from pollution controls.
But whether this is so or not, we believe that a good grasp of the
conceptual issues at stake in the pollution/environment debate is a
crucial prerequisite for sensible policy formulation. Notthing, either in
Richardson’s comments or elsewhere, has persuaded us otherwise.
References
[l] Tony Chisholm, Cliff Wahh and Geoffrey Brenman, ‘Pollution and Resource
Allocation’, Australian Journal of Agricultural Economics, Vol. 18, No. 1,
AM1 1974.
[2] R. A. Richardson, ‘Pollution and Resource Allocation: C m e n t ’ , A ustraliun
Journal of Agricultural Econmics, this issue.
2 Our decisiin not to examine recycling in detail is therefore w more surprising
than our failure to discuss at some length the theory of induced technical change.
3For instance, direct regulations are likely to cbe the most appropriate policy
in situations where the level of pollution damage is subject to sudden and extreme
fluctuations as a result of stochastic disturbances arising from, say, unusual
metemlogical conditions.
References (2)
- Tony Chisholm, Cliff Wahh and Geoffrey Brenman, 'Pollution and Resource Allocation', Australian Journal of Agricultural Economics, Vol. 18, No. 1, AM1 1974.
- R. A. Richardson, 'Pollution and Resource Allocation: C m e n t ' , A ustraliun Journal of Agricultural Econmics, this issue.