Discussion Paper

A Comment on “Efficient Pollution Regulation: Getting the Prices Right” by Muller and Mendelsohn

Abstract

In their recent paper, “Efficient Pollution Regulation: Getting the Prices Right” (henceforth, EPR), Muller and Mendelsohn describe a broader, more appealing concept of efficiency that incorporates information on damages caused by emissions from specific sources: “The science and economics related to pollution control”, they write, “have advanced to the point where regulations can now move from cost-effectiveness to efficiency.” We argue that despite the appeal of the EPR solution, its conclusion that source-specific marginal damage estimates are ready for use in regulations is simply incompatible with the empirical evidence presented in EPR. In particular, we explore the implications of the EPR finding of negative marginal damages from NOx emissions for many heavily populated counties. The associated nonconvexities, we show, imply that the source-specific trading ratios that EPR advocates lead to unattractive outcomes not likely to be efficient. We also discuss how the EPR assumption that the regulators know damages with certainty oversimplifies key aspects of efficient air pollution regulation.