The demand for and marginal cost of air pollution abatement: an implicit market analysis

Hilary Herbert Smith

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The demand for air pollution abatement used the median voter model as its theoretical basis. A utility function for the median voter was devised with air pollution abatement as one of the goods. This utility function also incorporated transpolitical boundary costs and benefits. Implicit prices were derived from the expenditure identity: price times quantity equals expenditures. Data on air pollution abatement and expenditures for air pollution abatement by state governments and two-digit SIC manufacturing industries were used. Only point source manufacturing air pollutants were considered. The utility function was maximized subject to a budget constraint, and ordinary demand functions were derived;Air pollution abatement was hypothesized to be a public good produced by a figurative joint firm of the state governments and private emitting industries. This figurative joint firm was assumed to minimize the cost of abatement. A marginal cost function for abatement was derived by minimizing costs subject to an output constraint. Competitive behavior was assumed for the figurative joint firm with price set equal to marginal cost;The exogenous variables on the demand side included gross personal income, attitudes about environmental quality in the previous year, stock of air pollution in the previous year and a measure of the skewness of the distribution of income. The exogenous variables in the marginal cost equation include wages of state government workers enforcing air pollution regulations, wages of private industry air pollution abatement workers, the user cost of capital and the stock of air pollution in the previous year;Econometric estimates of the demand and marginal cost equations were derived using two-stage least squares. The data were pooled time-series and cross-section observations of the fifty states of the United States for the period 1974-1978;Significant findings include low elasticity of demand for air pollution abatement with respect to price (-0.17) and with respect to income (0.44). Also of note is the elasticity of demand with respect to income distribution skewness (1.56) leading to the inference that those who are decisive in determining the level of air pollution abatement benefit through cost shifting from skewed income distributions.

Date: 1982-01-01
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