Abstract

The contribution of this paper lies in deriving socially optimal abatement (pollution avoidance) explicitly from separate technologies for production as well as control, where ‘control’ refers to decomposition of pollutants into harmless matter. This would help to construct welfare maximizing interventions such as Pigouvian taxes, given that a firm would respond to such an intervention by undertaking ‘reduction’ of its output and ‘control’, the two constituents of socially optimal abatement. Two cases are considered in this paper: zero and positive marginal cost of control at zero level of control. Cost minimization of a targeted level of abatement implies that the first case results in positive levels of both ‘reduction’ and ‘control’. The second case is associated with reduction equaling abatement for abatement below or equal to a threshold level, and positive levels of ‘reduction’ and ‘control’ otherwise. Thus, low enough marginal damages would be associated with low socially optimal abatement facilitated only through reduction; otherwise, a high enough socially optimal abatement facilitated by ‘reduction’ as well as ‘control’ would result. Further, an increase in the efficiency of the control technology which lowers the mentioned threshold level might have no impact on the magnitude of socially optimal level of abatement when marginal damages are low enough.

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