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Do Lower Prices For Polluting Goods Make Environmental Externalities Worse?

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  • Brennan, Timothy J.
Abstract
Lower prices for polluting goods will increase their sales and the pollution that results from their production or use. Conventional intuition suggests that this relationship implies a greater need for environmental policy when prices of "dirty" goods fall. But the economic inefficiency resulting overproduction of polluting goods may fall, not rise, as the cost of producing those goods falls. While lower costs exacerbate overproduction, they also reduce the difference between private benefit and the total social cost--the sum of private and external costs--associated with that overproduction. We derive a test, based on readily observed or estimated parameters for conditions in which the latter effect outweighs the former. In such cases, making a dirty good cheaper to produce may reduce the need for pollution policy. This test, with minor modifications, can be applied where the dirty good is not competitive, demand rather than supply drives the increase in output, and abatement in production can reduce pollution. The analysis may speak to whether stricter air pollution regulations should accompany policies to reduce electricity costs by making power generation more competitive.

Suggested Citation

  • Brennan, Timothy J., 1999. "Do Lower Prices For Polluting Goods Make Environmental Externalities Worse?," Discussion Papers 10776, Resources for the Future.
    • Handle: RePEc:ags:rffdps:10776
    DOI: 10.22004/ag.econ.10776
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    References listed on IDEAS

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    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
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    5. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, April.
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    Cited by:

    1. Burtraw, Dallas & Palmer, Karen L. & Heintzelman, Martin, 2000. "Electricity Restructuring: Consequences and Opportunities for the Environment," Discussion Papers 10854, Resources for the Future.
    2. Burtraw, Dallas & Palmer, Karen, 2005. "The Environmental Impacts of Electricity Restructuring: Looking Back and Looking Forward," RFF Working Paper Series dp-05-07, Resources for the Future.

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    Keywords

    Environmental Economics and Policy;

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