(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 691

666 PART 4 • Information, Market Failure, and the Role of Government
to quantify, automobile manufacturers are now offering acid-resistant paint on new automobiles at an
average cost of $5 per car, or $61 million for all new
cars and trucks sold in the United States.
What about the costs of achieving reductions in
sulfur dioxide emissions? To achieve these reductions, firms need to put emissions-control equipment into use. The incremental cost of achieving
some emissions reduction is likely to be small, but
that cost increases as greater and greater investments in capital equipment are needed to achieve
further reductions.
An example of the costs and benefits of reducing sulfur dioxide emissions is given in Figure 18.3,
which is based on a study of pollution abatement
in Philadelphia.3 It is easiest to read the graph from
right to left, since we are looking to see how much
of a reduction in sulfur dioxide concentrations from
the existing level of .08 parts per million is socially
desirable. The marginal abatement cost curve is
increasing (from right to left); it jumps whenever
new capital-intensive pollution-control equipment is
needed to improve fuel efficiency.

The marginal external cost curve reflects (again
reading from right to left) the incremental reduction in the harms caused by acid rain. For moderate concentrations, studies of respiratory diseases,
corrosion of materials, and lost visibility suggest
that marginal social costs are high and relatively
constant. However, for very low concentrations,
the marginal external cost declines, and eventually
there are relatively few adverse health, material, or
aesthetic effects.
The efficient level of reduced sulfur dioxide
emissions is given by the number of ppm at
which the marginal cost of reduced emissions is

equal to the marginal external cost. We can see
from Figure 18.3 that this level is approximately
.0275 ppm.
To sum up, there are clearly substantial benefits to reducing sulfur dioxide emissions. What
if any policies are best utilized to achieve those
reductions efficiently? We will return to these
questions after we consider a variety of policy options for the treatment of externalities in
Section 18.2.

Dollars
60
per
unit of
reduction

F IGURE 18.3

40

SULFUR DIOXIDE EMISSIONS
REDUCTIONS
The efficient sulfur dioxide concentration
equates the marginal abatement cost to the
marginal external cost. Here the marginal
abatement cost curve is a series of steps,
each representing the use of a different
abatement technology.

Marginal External Cost
20

Marginal Abatement Cost
0

0.02

0.04

0.06

0.08

Sulfur dioxide concentration (ppm)

3
Thomas R. Irvin, “A Cost Benefit Analysis of Sulfur Dioxide Abatement Regulations in
Philadelphia,” Business Economics, September 1977, pp. 12–20.