Lowering the Cost of Pollution Control versus Controlling Pollution: A Comment

Lowering the Cost of Pollution Control versus Controlling Pollution: A CommentAuthor(s): Michael BrooksSource: Public Choice, Vol. 110, No. 1/2 (2002), pp. 163-172Published by: SpringerStable URL: http://www.jstor.org/stable/30026385 .

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Public Choice 110: 163-172, 2002. 163

© 2002 Kluwer Academic Publishers. Printed in the Netherlands.

Lowering the cost of pollution control versus controlling pollution: A comment *

MICHAEL BROOKS School of Economics, University of Tasmania, GPO Box 252-85, Hobart 7001, Australia; e-mail: Michael.Brooks @utas.edu.au

Accepted 20 July 2000

Abstract. Dwight Lee (1999) shows that the collectivity may be better, not worse off, when a

technically "inefficient" pollution abatement technology is adopted. The purpose of this note is twofold. First, to show that once rent-seeking is incorporated into the analysis, Lee's qualified support for a technically inefficient pollution abatement technology is at best problematic, and at worst flawed. Second, to demonstrate that it is possible to make a less problematic normative case in favour of the adoption of the technically inefficient abatement policy.

1. Introduction

Economists are particularly fond of generating counter-intuitive results. The "invisible hand" theorem is a prime example of the economist's endeavour. Dwight Lee's (1999) argument on pollution abatement adds to the list of paradoxical results.

Dwight Lee (1999) shows, by means of a subtle application of the general logic of second-best theory, that the collectivity may be better, not worse off, when a technically "inefficient" pollution abatement technology is adopted. The purpose of this note is twofold. First, to show that once rent-seeking is incorporated into the analysis, Lee's qualified support for a technically inefficient pollution abatement technology is at best problematic, and at worst flawed. Second, to demonstrate that it is possible to make a less problematic normative case in favour of the adoption of the technically inefficient abatement policy.

2. Lee's model of the political equilibrium

In order to provide a convenient point of reference, it is useful to first set out the basics of Lee's argument. Consider Figure 1, which is a modified version

* I would like to thank Dwight Lee for valuable comments on the initial draft of this paper. All the errors fall on me.



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of Lee's Figure 1.1 The curve MC depicts the marginal cost of pollution abatement under the least-cost technology. The curve D is the marginal social benefit from pollution abatement. The first-best optimal level of pollution abatement is A* and the net benefit is given by area abc. Lee argues that A* is unlikely to emerge as a political equilibrium. When pollution abatement is undertaken according to the least-cost technology, few economic rents are created for the members of the environmental-industrial complex (EIC). Accordingly, the political demand for pollution abatement is low as represented by curve PDLC. Following Lee's assumption that the political process responds to the actual marginal cost of pollution abatement, the equilibrium level of pollution abatement is ALC. The net benefit from pollution abatement is ab'c'c. Clearly, the public sector fails, as judged from the ideal level of abatement: The net benefit from the political equilibrium is less than the amount that could be secured if there were no imperfections in the political process. But Lee is right to draw on the basic public choice principle that failure is a matter of a comparison between relevant alternatives. Lee

suggests that an improvement is possible over the actual equilibrium when the EIC lobbies for a higher-cost pollution abatement technology such as that found under the command-and-control approach. This result seems to be paradoxical. The higher-cost abatement technology, as represented by a leftward shift in the marginal cost curve to MCI, must mean the collectivity forgoes more of some other output in order to maintain the same level of

pollution abatement. Higher costs normally mean a reduction in net benefits. Paradoxical as it might be, Lee is nevertheless right in singing the praises of the technically inefficient technology. The higher-cost technology creates economic rents which means that the political demand for pollution abatement shifts to the right to, say, PDI. Under the higher-cost technology, the amount of pollution abatement at the political equilibrium is now larger, as constructed in Lee's figure, at A1. Lee (1999: 129) claims:

... the net benefit from pollution abatement [is] given by area defc'c. Note that abatement level A1 is less than the ideal level A* because marginal abatement cost is in excess of the least-cost level. However, the abatement level and ... the net benefits from abatement are greater than they would be with least-cost abatement policies.

Consequently, the least-cost abatement technology is Kaldor-Hicks inferior to the higher cost technology. As Lee (1999: 123) claims in his opening remarks the:

...move to a market-based approach to pollution control would result in less pollution control and be less efficient than the existing command-and control approach.



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A3-k A3 A3+k

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Figure 1. Benefits and cost from pollution abatement.



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At this point it is worth acknowledging that Lee did not claim that the adoption of an inefficient approach to pollution control was bound to result in an improvement. Lee shows that only under some conditions will the inefficient approach be preferred.

3. Optimal departure for least-cost technology and rent-seeking

There are a number of problems, however, with Lee's analysis. First, a minor objection can be raised to Lee's conclusion. Contrary to Lee's claim, the abatement level A1 is less than the ideal level not because the marginal abatement curve is in excess of the least-cost level. The political equilibrium is less than the ideal in Lee's analysis because the political demand curve lies below the actual net social benefit curve and the marginal abatement curve lies above the least-cost level. Even if the actual marginal abatement cost curve coincided with the least-cost one, the political equilibrium would still lie below the ideal level, in Figure 1 at A2, because the political demand curve lies to the left of the actual marginal social benefit curve.

The significant problem with Lee's analysis is the failure to take on board one of the main insights of public choice theory, namely that the existence of rents induces a wasteful process of capture. In Lee's analysis the higher- cost technology is politically more popular because it creates rents. But Lee

completely fails to reckon with the cost of rent-seeking to obtain those rents. When the problem of rent-seeking is taken on board, Lee's demonstration of the superiority of the technically inefficient policy is at worst flawed.

In order to examine the impact of rent-seeking on Lee's conclusion it is necessary to determine the amount of rents created from the command-and- command approach. Several interpretations are possible of the amount of rent going to the EIC. It is possible to argue that the vertical difference between the

political demand curves PDLC and PD1 represents the amount the EIC is will-

ing to pay to have the high-cost abatement technology. On this interpretation, the amount of potential rents created by the inefficient policy is represented by the difference between political demand curves PDLC and PD1. Under the

assumption of competitive rent-seeking, the waste from rent-seeking at the

political equilibrium is given by the area of nA3A1eq. The net benefit from the adoption of the high-cost abatement technology is now given by area cfeq plus dnr minus area rA3Ale. Since the net waste from rent-seeking, exceeds the net benefit from pollution abatement, the net benefit from the adoption of the higher-cost abatement policy is negative, that is rA3Ale, exceeds cfeq plus dnr. The higher-cost technology and the resultant political clamouring for pollution abatement is an inferior policy. The collectivity would be better off with the least-cost pollution abatement technology where the members



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gain at least the amount represented by area ab'c'c. Lee's demonstration of the superiority of the technically inefficient pollution abatement technology is therefore found wanting.

Admittedly the critique of Lee's analysis is based on the assumption that the individuals who bear the cost of pollution abatement are different from the set of individuals who politically demand the control. It assumes that the cost of pollution abatement is passed onto the consumers of the EIC's products. Clearly this assumption is not a general one. The market structure may be such that the EIC has to bear some of the higher cost of the inefficient abatement policy. Under the assumption that the higher cost falls completely on the producers, the amount the EIC would be willing to pay to have the higher- cost pollution abatement technology is given by the difference between the two political demand curves minus the actual cost of the pollution control, which is represented by area nreq in Figure 1.

Under the assumption of competitive rent-seeking the extent of waste from rent seeking is represented now by area nreq. The net benefit from the imple- mentation of the inefficient pollution abatement technology is represented by the two areas ndr plus qefc. Here the net benefit from pollution abatement is greater under the least-cost technology than the high-cost technology. The amount of net benefits at the political equilibrium ALC is larger than the area of net benefits even when there is a good deal of political demand for pollution abatement, ie. area ab'c'c is greater than area ndr plus qefc. Manifestly, Lee's case in favour of the technically inefficient abatement policy is flawed. In a rent-seeking environment if a choice must be made here between the technically efficient and technically inefficient approaches to pollution abatement, then the collectivity can be better off with the least-cost technology even when it means that there is little political will for pollution abatement.

Even under a more favourable set of assumptions, Lee's case in favour of the high-cost pollution abatement policy is something of a mixed bag. In Lee's framework, the more the vested interest groups gain from the higher- cost technology the higher the political demand for pollution abatement and the better the outcome for the collectivity in terms of the level of pollution abatement. If, for example, the political demand curve PD1 coincides with marginal social benefit curve, D, then the collectivity's net benefit rises from cc'b'a to a maximum at csd. But once rent-seeking costs are taken on board the higher the rents from political action, the greater the loss to the collectivity in terms of wasteful competition. When there is competitive rent seeking, the net gain to the collectivity falls from cfeq plus nrd to nrd.

In a rent-seeking environment, Lee can maintain the case in favour of the technically inefficient policy by reducing the size of the potential gain to the EIC. Suppose, for example, the political demand for pollution abatement



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under the high-costs technology is represented by PD2 instead of PD1. Here the amount of pollution abatement under the political equilibrium involves A3 units of activity. If the higher-cost of pollution abatement is borne by the EIC, then the loss from rent-seeking at the political equilibrium is represented by area nrhg. Here the loss from rent-seeking is offset by the larger gain to the rest of the collectivity from the larger amount of pollution abatement i.e., ghrn is less than c'khu. Since the net gain from the additional abatement exceeds the additional cost of the inefficient technology, i.e., c'khu is greater than adtb', the collectivity is better off under the inefficient technology.

But the case just made in favour of the technically inefficient policy represents a significant retreat from Lee's strong case for the normative superiority of the higher-cost technology. As the political demand for pollution abatement is shifted to the left in order to drive down the extent of loss from rent-seeking, the rest of the collectivity suffers a loss from the reduction in the level of pollution abatement.

The analysis here also raises a policy dilemma that is simply not confron- ted in Lee's framework. Although Lee is clearly in favour of broad political reforms, he seems to be tolerant of interest-group activity here as long as this leads to a net benefit directly from the expansion in pollution abatement. The analysis here suggests that once the rent-seeking cost of interest-group activity is taken on board, then Lee's qualified support for the inefficient approach must be amended still further. In Lee's analysis, the superiority of the 'inefficient' approach turns on the extent of the relative shifts in the marginal abatement cost curve and the political demand curve. The discussion here suggests that the superiority of the inefficient approach depends also on the extent of the loss from rent-seeking. Any expansion in pollution abatement will be valued by the collectivity only if the net gains to the rest of the collectivity are not outweighed by the waste from rent-seeking by the EIC.2 In all other cases, the collectivity will want to take steps to reduce interest group activity even if means that there will be little electoral support for pollution abatement. The policy dilemma then is to design institutions to

mitigate the waste from rent-seeking activity without harming the incentive of interest groups to lobby for a collectively-preferred policy. In the absence of

any clear idea how that might be done it might be thought that the normative case for the higher-cost abatement approach falters badly. The critique of Lee's argument here might be seen as a source of disappointment. After all, part of the appeal of Lee's argument lies in the intriguing proposition that the widespread use of the technically inefficient command and control approach to pollution abatement can be grounded on normative principles. But paradise need not be all lost. In the next section I put forward an alternative argument for the normative superiority of the high-cost pollution abatement technology.



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4. Optimal departures from least-cost technology regained

It is possible to mount a case in favour of the higher-cost abatement technology within the confines of a demand driven model of the public sector. Under a demand-driven model of the public sector, politicians serve the interests demanded by the electorate at large. Lee acknowledges the demand side but sees very little role for such in any account of the policy process:

... the political response to generalised concerns is usually rhetoric and the appearance of action rather than serious efforts to address the concerns. Without the EIC the public demand for environmental quality would motivate [little demand for political action]. [Lee (1999): 127]

Any assessment of electoral pressures for pollution abatement ought be pur- sued, however, in a comparative framework of the relevant alternatives. In order to see what is at stake in such a comparison, consider the lay-person's typical attitude towards the market-incentive approach to pollution control advocated by economists. Pollution policies that are judged well by economists are not likely to fit the romantic demands of the passionate voters.3 Individu- als at the ballot box are likely to express their support for pollution policies that are seen as fair. Voters see incentive schemes advocated by economists as providing the rich industrialists with a license to pollute. Accordingly, voters seem to find more appeal in the command-and-control approach in which all firms rich and poor alike must meet some pollution abatement target.

In line with these general observations suppose the expressive preference for pollution abatement held by a third of the electorate for the least-cost pollution technology is represented by the curve 1 in the bottom panel. The voters prefer an abatement level ALC and would be willing to support any policy a k-distance from their ideal point.4 Any pollution abatement policy outside these bounds will fail to elicit any electoral support from this group of voters. Consider now the expressive preferences for the remainder of the electorate. Suppose two-thirds of the electorate prefer a pollution abatement level A3 when the command-and-control approach is adopted. The expressive preference of this set of voters is represented by curve 2. In this case the political equilibrium will be for the abatement level, A3.

It is worth noting that the argument here is in line with Lee's gener- ally pessimistic view of the amount of political demand by the electorate at large. The level of support by the voters for pollution abatement is low under either policy regime as compared to the ideal amount. The difference between Lee's analysis and that found here is that I allow for the proposition that the political equilibrium, in the absence of interest group activity, var- ies across institutional arrangements." If the high-cost pollution abatement



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technology captures the imagination of a majority of the electorate and the majority expresses support for a higher level of pollution abatement than can be secured under the least-cost technology approach, then the technically inefficient policy may be preferred on normative grounds.6 Although the expressive preference for pollution abatement diverges from the actual social benefit from pollution abatement, there is still a larger political demand for pollution abatement when the command and control approach is pitted against the market incentives approach. The net gain from placing the high-cost pollution abatement technology against the least-cost technology on the political agenda is c'kht minus ab'td. Here the high-cost pollution abatement technology is Kaldor-Hicks preferred to the least-cost technology. It is worth asking whether the normative case made here for the technically inefficient pollution abatement approach is affected by the omnipresent spectre of rent-seeking? Rent-seeking can be a problem but it need not always be so. Consider the

political demand for pollution abatement by the EIC as represented by PD2. If the EIC correctly anticipates that the electorate at large will approve the command and control approach, then the EIC will not undertake any rent- seeking activity itself. In this case, the majority rule equilibrium, A3, fully coincides with the equilibrium that would be sought by the interest group and rent-seeking by the EIC would be pointless. Here the gains from pushing the level of pollution abatement towards the ideal level are not dissipated by the cost of rent-seeking by the EIC. No doubt some resources will be expended on the political campaign over the preferred pollution policy. Politicians will expend resources on trying to work out the vote-maximising policy. But as long as these costs are less than the net gain from pollution abatement, then the normative superiority of the technically inefficient command and control approach will continue to hold.

Rent-seeking is a potentially greater problem when the demand for pollution abatement by the EIC is higher than the voters' expected support for pollution abatement. If, for example, the EIC's political demand for pollution is represented by PD1, then the EIC can be expected to begin to lobby for

pollution abatement; specifically to lobby for the level of pollution abatement

A1 as opposed to A3. Under the assumption that the EIC bears the cost of

pollution abatement, the lion's share of the gain is dissipated in rent-seeking. Here the potential net gain from increased pollution abatement is represented by area kfev. Since the loss from rent seeking exceeds the actual net gain from pollution abatement, i.e. hve exceeds kfev, then the collectivity would want to undertake reforms to reduce interest-group activity even though it means that the political demand for pollution abatement would remain low. Significantly, even if rules can be put in place to eliminate rent-seeking, the normative case for the technically inefficient approach holds as long as a



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majority of the voters express a preference for a marginally higher level of pollution abatement when the command and control approach is pitted against the market incentives approach. In Lee's analysis if rent-seeking activity can be eliminated, then the political demand for pollution abatement does not push the equilibrium beyond ALC. Consequently, in Lee's framework when rent-seeking is seen to be a problem and corrected, the normative superiority of the higher cost approach to pollution abatement founders completely.

5. Concluding comments

The message of Lee's paper that analyses of pollution policies must be carried out in terms of the relevant alternatives rather than some theoretical ideal is well taken. Lee is right in raising the possibility that technically inefficient policies may be required in order to push the actual political equilibrium towards the ideal. Lee errs in proving his case, however, because he fails to take account of the costs of rent-seeking. In some settings the collectivity would want to take steps to minimise interest group activity, even though it might result in a lower political equilibrium for pollution abatement. This is not to say that some support for the adoption of a technically inefficient pollution abatement approach cannot be mustered. If the high-cost pollution abatement technology captures the imagination of a majority of the electorate and that majority expresses support for a higher level of pollution abatement than can be secured under the least-cost technology approach, then the technically inefficient policy may be Kaldor-Hicks preferred. And this result holds even when rent-seeking costs are included in the analysis.

Notes

1. Although I have modified Lee's figure in a number of different directions, primarily by the addition of a second panel and the addition of another political demand curve, it retains the labelling and curves found in Lee's Figure 1.

2. For an example of a situation to avoid, compare the political equilibrium that emerges when the electorate at large expresses support for command and control approach with the political equilibrium that is obtained when the EIC lobbies for the pollution abatement policy. In keeping with Lee's analysis the interest group activity of the EIC pushes the level of pollution abatement beyond the level that would be supported by the electorate at large, A3 is larger than A1. The additional gain, net of the actual costs of pollution abatement, is represented by area hefk. But under the assumption that the EIC is able to pass on the costs of pollution abatement, then the loss from rent-seeking equals area A3Al fk. Here the loss to the collectivity exceeds the gain from the expansion in pollution abatement. The collectivity would be better off to adopt policies to eliminate rent-seeking activity even though it means that the level of pollution abatement that emerges as the voters pull the levers is far below the ideal level.



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3. See Brennan and Lomasky (1993) who argue that fair policies can be a potent symbol around which to rally the support of the electorate at large.

4. See Brennan and Hamlin (1998) for a general discussion of expressive preferences and electoral equilibrium.

5. And even in this case the increase in the level of pollution abatement is relatively modest compared to the difference in political equilibria found in Lee's analysis i.e., A3 - ALC is less than Al - AL3.

6. No claim is made here that electoral pressure for pollution abatement when the technically inefficient policies is put on the agenda will always result in a Kaldor-Hicks improvement. The majority of the electorate could express support for the command and control approach at a level of pollution abatement that is too large. If, for example, the majority rule equilibrium occurs well to the right of the ideal level, then the initial gains from pollution will be wiped out by the losses from excessive pollution abatement. Further discussion of the political equilibrium, which could emerge from the political process using the notion of expressive voting albeit in a different context can be found in Brooks (1997).

References

Brennan, G. and Hamlin, A. (1998). Expressive voting and electoral equilibrium. Public Choice 95: 149-175.

Brennan, G. and Lomasky, L. (1993). Democracy and decision: The pure theory of electoral

preference. Cambridge: Cambridge University Press. Brooks, M. (1997). Pollution taxes: A public choice perspective. In J.G. Head and R. Krever

(Eds.), Taxation towards 2000, 239-263. Australian Tax Research Foundation. Conference Series No. 19. Deakin University.

Lee, D.R. (1999). Lowering the cost of pollution versus controlling pollution. Public Choice 100: 123-134.



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Lowering the Cost of Pollution Control versus Controlling Pollution: A Comment