In the event of pollution control there arises the difficulty of ascertaining who will benefit more and who will benefit less. The implementation of environmental policy should be based on two important criteria i.e. efficiency and equity.
Though Pareto – Optimum can define efficiency is resource allocation it would be highly generalized as the existence of an infinite number of income distributions would result in an infinite number of Pareto optimal States.
From the environmental perspective the approach is simplified as it works by the “polluters pay” principle. However, according to politicians and economists the entire program is governed by the distribution of costs and benefits.
Equity and Benefits:
The problem of equity analysis if the incidence of pollution falls on the rich, the poor, or everyone in society. Environmental quality is a luxury good and will therefore not be demanded by the poorer sections of society as they would be more concerned with essentials, discounting environmental qualities due to their low income levels.
Hence, the impact of environmental policy programmes will not be equal and uniform in its incidence as the priorities of the poor are different from those of the rich. The distribution of the benefits of pollution program control should also be considered carefully, as there are two conflicting influences on the distribution of benefits.
Firstly, if pollution levels are fairly uniform in a pollution control area, then the benefits of abatement will be equally available to all and this is a public good. However if richer classes attach greater value to a given amount of pollution abatement then the situation will be different. Therefore, even the benefits of public goods can be progressive or regressive depending on the tastes of people in different income groups.
Secondly, the rich may benefit relatively by their ability to select pollution – free place to live. Rich suburbs are polluted less than interior city slums. Suppose the rich tended to live in areas that offer heavy benefits from pollution control, there would be a regressive element in the benefit distribution. Thus any environmental program would tend to disproportionately accrue more benefits to the affluent.
It is a complicated affair involving the distinction between two types of pollution control costs.
i. Real Resource Costs:
These are costs related to land, labour, and capital that must be used in clearing the pollution generated, recovering the wastes and recycling them so that they may not be discharged into the environment. When public agencies undertake this job the costs involved are passed onto the tax payers of the city or town.
On the other hand, if polluting firms were to undertake these efforts the costs would be passed onto consumers in the form of higher prices for goods and services. These are opportunity or real costs that represent opportunities foregone as these resources could have been put to some other use.
ii. Factor Income Costs:
These costs represent those changes in labour and capital incomes due to pollution control measures. Pollution control programmes may result in changes in factor prices, as some resources become less valuable resulting in their owners experiencing a reduction in incomes.
For example, in japan, in an effort to control poaching of whales a global environmental policy has been implemented reducing the demand for whale meat and the subsequent reduction in incomes.
Thus in the case of factor income costs, they are not necessarily real costs however in the short run factor income costs may also be real costs. If real costs of firms were to increase prices would increase forcing a reduction in output. Labour would remain unemployed and therefore incur significant factor income cost.
A major question is with respect to who bears the incidence of these costs. Resource costs may be passed on to consumers as high prices. This would be regressive, as lower income groups would be paying a higher proportion of their incomes. However it is possible to design public policies to redistribute pollution costs.
This involves two categories, Direct and indirect grants and subsidies designed to shift the costs from consumers as a group to taxpayers as a group, and within the group of taxpayers from lower income to higher income tax payer. This is a policy of cost subsidy.
The second type of policy namely adjustment assistance deals with factor income costs that help labour adjust to the changed economic conditions brought about by the implementation of pollution control programmes.
It consists of payments to owners of factor inputs who were adversely affected by the environmental control policy. Also called targeted assistance, it helps workers get unemployment compensation and relocation allowances for moving to areas where prospects of employment are better.
The equity efficiency trade-off is a fundamental problem in environmental policy and this becomes more complex if we extend equity concept to include the welfare of the future generation. It is not necessary that a program that does not satisfy the equity requisite should be rejected outright even if it satisfied the efficiency criterion. A compromise is necessary.